Sovereign credit ratings and bond yield spreads in emerging markets

Saji Thazhugal Govindan Nair

Journal of Financial Economic Policy, 2019, vol. 12, issue 2, 263-277

Abstract: Purpose - This paper, using the model suggested by Cantor and Pecker (1996), aims to explore the relations between sovereign ratings and bond yield spreads in emerging markets. Design/methodology/approach - The ordinary least square regression procedure administered on the most recent sovereign ratings of 46 countries demonstrates how the macroeconomic information embody in the sovereign rating scores predict their bond yield spreads relative to the yield on US Treasury bond. Findings - The research finds that the assigned rating scores do not herald the complete elites of the macroeconomic conditions in emerging markets, and there is more incremental information in the publicly available macroeconomic variables, which is much useful in predicting bond yield spreads than that embedded into the sovereign ratings. Practical implications - The outcomes of the research have strategic implications for global investors and policymakers. The use of credit rating scores along with the macroeconomic fundamentals in emerging economies produces better predictions than the benchmark predictions solely based on the rating scores suggested by the previous research. Originality/value - This study is the first one to address the issues related to sovereign ratings and bond yield spread in developing and emerging markets using the most recent ratings during the period of the economic recoveries, following the global financial crisis of 2008.

Keywords: Sovereign ratings; Macroeconomics; Bond yield spread; Macroeconomics and monetary economics; Debt; Bond interest rates; Econometric modelling; C21; F41; G12; G24 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-04-2019-0068

DOI: 10.1108/JFEP-04-2019-0068

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