Investor redemptions and fund manager sales of emerging market bonds: how are they related?*
and Hyun Song Shin
Lending to emerging market economies (EMEs) through bond purchases has surged
since 2009. What are the risks of a sudden stop? Bond mutual funds may curtail
credit through two channels. The first is redemptions by ultimate investors. The
second is additional discretionary sales by fund managers, over and above any sales
implied by redemptions. In an empirical analysis of EME bond funds, we find that
discretionary sales tend to reinforce the sales due to investor redemptions, and that
100 dollars’ worth of bond sales due to investor redemptions is accompanied by
roughly 10 dollars’ worth of discretionary bond sales. We also find that 100 dollars’
worth of EME international bond sales is associated with around 4 dollars’ worth of
valuation losses. Finally, a 1 percentage point increase in the yield of local currency
bonds is associated with a 10% decline in the dollar value of bond holdings.
JEL classification: G11, G15, G23.
Keywords: emerging market, sudden stop, financial crisis, global liquidity reversal,