Did covid stimulus tame EM bond yields?

Quantitative easing (QE) measures, or long-term asset purchases, were heavily used by central banks as a stimulus measure after the financial crisis of 2008. The covid-19 pandemic has prompted central banks to make similar decisions again. But a new study points out that the reaction of bond markets to such steps has been starkly different in developed and emerging economies.

The analysis, a working paper by the US National Bureau of Economic Research, finds that QE announcements brought down yields of benchmark government securities much more in emerging markets than developed ones. Even in developed markets, the impact was slightly lower than was seen during the previous recession.

The study analyzes 24 QE announcements made by 21 central banks, including India’s, since the pandemic began. Using Reuters data, the authors record the change in 10-year benchmark government bond yields within a three-day window from the date of the announcement. The study compares this effect with historical bond yields since 2017.

Compared to the 2008 recession, more central banks across emerging and advanced economies used QE interventions during the covid-19 crisis. On average, the study finds a 0.23% one-day decline and a 0.31% three-day decline in yields after the announcement this time. But in reality, the range was wide: the one-day decline ranged from just 0.14% in developed economies to 0.28% in emerging ones, while the three-day decline was 0.11% and 0.43%, respectively, the authors find.

The study attributes a larger effect in emerging economies to the use of such interventions for the first time. Overall, central banks in both kinds of economies managed to reverse the peaking yield curve using QE effectively, the study concludes.

Also read: An Event Study of COVID-19 Central Bank Quantitative Easing in Advanced and Emerging Economies

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