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Abstract

This paper examines the impact of oil price innovations on emerging market sovereign total bond returns, as measured by the JP Morgan Emerging Market total return bond index, for portfolios of oil exporting and oil importing countries from 2007 to 2015. Globally emerging markets have benefited from investors desire for global diversification and search for higher yield returns. This recent wave of investor demand has provided equal benefits to investment grade and non-investment grade countries and has reduced reliance on International Finance Institutional sources. Understanding oil price interaction with bond returns and the investor perception of oil price innovations on sovereign credit risk is important as many bond market investors have short investment horizons which may influence the country’s ability to access international markets for funding during adverse market conditions. This paper finds that oil prices have a statistically significant influence on portfolio total bond returns for global-focused oil exporters and importers. Exporter bond returns increased and Importer bond returns decreased under positive oil price shock conditions, implying that sovereign governments are exposed to changes in investor risk perception and cost of borrowing under oil price shock scenarios.

Keywords: Emerging Markets, Sovereign, Bond Returns, Debt, High Yield, Oil Markets, Oil Price Shocks.