What happens to EMEs when US yields go up?

BIS Working Papers  |  No 1081  | 
08 March 2023



We study episodes of rapid increases in 10-year US Treasury yields and their effect on emerging market economies (EMEs). We focus on four outcomes of interest in EMEs: local currency yields, exchange rates, equity prices and portfolio fund flows. We use statistical techniques to identify the key US, global and EME-specific financial developments associated with negative outcomes in EMEs during episodes of rapid increases in US yields.


While the experience of the last two decades teaches that rapid increases in US yields can be inconsequential for EMEs, some of these episodes resulted in a significant retrenchment of investors from EME assets. On those occasions, EMEs faced sharp currency depreciations, drops in asset prices and large capital outflows. Whereas the factors that led some EMEs to be more affected in specific episodes have been well studied, much less is known about why some episodes of rapid increases in US yields have adverse effects on EMEs and others do not. This paper fills that gap, exploring why some episodes of US yield increases result in investor retrenchment from EMEs and others do not.


We find that two developments in particular increase the odds of an US yield increase spilling over into EMEs: increases in the US term premium and an appreciation of the US dollar against a broad basket of currencies. The estimated effects of these variables are both statistically and economically significant. US macroeconomic conditions also matter – in particular, increases in US inflation expectations. By contrast, EME fundamentals, such as international reserves, current account balances, sovereign ratings and forecasts of GDP growth, seem to matter comparatively little. Only higher levels of domestic inflation in EMEs come out as robustly associated with worse EME outcomes (and only for currency depreciation).


This paper explores why some episodes of US yield increases result in investor retrenchment from emerging markets and others do not. To answer this, we identify episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with negative outcomes in emerging markets. We focus on four outcome variables: local currency yields, exchange rates, equity prices, and portfolio fund flows. We find that increases in US yields are more likely to be associated with adverse outcomes in emerging markets when they reflect (i) a rise in the US term premium, (ii) coincide with dollar appreciation, and (iii) rising inflation expectations in the US and in EMEs. The effects of these variables are highly non-linear and economically significant as well as robust to a variety of sensitivity checks.

JEL Classification: F30, F36, F42, F65

Keywords: monetary policy, international spillovers, term premium, US dollar