The authors decompose ten-year sovereign yields in 17 emerging markets into default-risk premia, expected short rates, and term premia. They find that debt vulnerabilities, including high foreign-currency borrowing, large foreign holdings of local-currency debt, and large domestic holdings of foreign-currency debt are associated with higher default-risk and term premia. While fiscal consolidation could lower term premia in vulnerable economies, easing borrowing conditions, stronger growth prospects, or anticipated monetary tightening could push expected short rates higher. Understanding these channels can help central banks assess overall financial conditions more accurately.
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