Flights-to-quality from EM Bonds to safe-haven US Treasury Securities: A time-frequency Analysis

Document Type

Article

Source of Publication

Emerging Markets Finance and Trade

Publication Date

1-1-2022

Abstract

We study 2001–2020 flight-to-quality episodes encompassing two planetary-scale crises: the Global Financial Crisis (GFC) of 2007–2008 and the coronavirus-triggered global meltdown. We focus on time-frequency lead-lag nexuses between holding emerging market (EM) debt and investing in relatively risk-free US Treasuries. Wavelet coherency along with the phase-difference approach is used. Our results reveal varying lead-lag patterns and low-coherence zones between EM bonds and US Treasuries, which imply the existence of appealing diversification attributes. The flights-to-quality during the crisis periods, such as the GFC and COVID-19 pandemic, emphasize the safe-haven characteristics of US Treasures. They also evidence that the post-Covid tightening of credit spreads to the pre-crisis levels is faster than the post-GFC recovery. We demonstrate that for EM debt investors, the US Treasury market allows for dynamic risk mitigation strategies during both global crises.

ISSN

1540-496X

Publisher

Informa UK Limited

Disciplines

Business

Keywords

emerging market debt, flight-to-quality, safe-haven US Treasuries, spread and total return, subprime and Covid-19 crises

Scopus ID

85134711127

Indexed in Scopus

yes

Open Access

no

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