IMF Working Papers

Fiscal Determinants of Domestic Sovereign Bond Yields in Emerging Market and Developing Economies

By Manabu Nose, Jeta Menkulasi

March 28, 2025

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Format: Chicago

Manabu Nose, and Jeta Menkulasi. "Fiscal Determinants of Domestic Sovereign Bond Yields in Emerging Market and Developing Economies", IMF Working Papers 2025, 059 (2025), accessed April 22, 2025, https://doi.org/10.5089/9798229005623.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Domestic sovereign bonds have become a growing source of government financing in Emerging Market and Developing Economies (EMDEs). This paper investigates the role of fiscal policies in determining domestic bond yields, and how this relationship varies depending on the debt structure. Specifically, the analysis highlights the interaction of fiscal policy with banking sector leverage and foreign investor holdings for government debt. A 1 percentage point increase in expected primary deficits results in a persistent increase in 10-year domestic bond yield by around 36 basis points over 2.5 years, with larger effects observed during the COVID-19 pandemic. This contrasts with external bond spreads which are more sensitive to external and global risk factors. The greater the reliance on domestic banks for deficit financing, the stronger the impact of loose fiscal policy on domestic bond yields. The shift in domestic debt financing towards domestic banks after the pandemic implies that sovereign yields have been increasingly interlinked with domestic banks’ investment behavior implying potential financial sector risks in major EMDEs.

Subject: Bond yields, Domestic debt, Financial institutions, Financial services, Public debt, Sovereign bonds, Yield curve

Keywords: Bond yields, Debt composition, Debt holder composition, Debt structure, Domestic bond yield, Domestic debt, Doom-loop, Fiscal discipline, Forward rate, Global, Holder composition, IMF working paper 25/59, Sovereign bond bond yield, Sovereign bonds, Sovereign-bank nexus, Yield curve

Publication Details

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