The one-eyed among the blind

Long-term bond yields have increased substantially since 2025 and there is increasing concern that these rising long-term bond yields may reflect fears about the solvency of countries like the US, Japan and others. But it isn’t just the fiscal situation of each country that determines bond yields, but the relative comparison to similar countries.

An analysis by the IMF of the relative importance for the long-term government bond yields of 80 emerging markets showed that it isn’t just the absolute debt level that matters. Rather, the chart below shows the relative importance of different factors besides absolute debt levels. Clearly, local inflation rates matter most, but then the relative debt level compared to similar countries comes next and is more important than market uncertainty (proxied by the VIX) or real GDP growth.

Drivers of sovereign risk spreads of emerging markets

It’s a little bit like the famous joke about how to escape a bear. You don’t have to be faster than the bear, just faster than the slowest person running away from the bear…