Emerging market local currency bonds: Diversification and stability

We examine the dynamics of emerging market (EM) local currency government bond yields for the last decade and a half as well as for three different phases (January 2000-December 2007, January 2008-April 2013, and since May 2013). We show that domestic factors have anchored EM local currency government bond yields, increasing the potential diversification benefit. Moreover, these yields have become relatively resilient to global risk aversion shocks. Yet, EM local currency government bond yields have been affected partly by very low US Treasury yields and are susceptible to the latter's increases.