Emerging market debt and the COVID-19 pandemic: A time-frequency analysis of spreads and total returns dynamics

We apply wavelet analyses to study the impact of COVID-19 pandemic on the performance of emerging market bonds, in both investment grade and high yield ranges of creditworthiness. Our results show varying level of coherence ranging from low, medium and high between the Coronavirus Media Coverage index and the price moves of the emerging market USD-denominated debt. We attribute the intervals of low coherence levels to the diversification potential during a systemic pandemic such as COVID-19 of investments in bonds issued by developing economies. We document differences in patterns exhibited by various indices describing behaviour of option-adjusted spreads and total returns as a function of credit quality of issuers form emerging market economies. We report well-defined zones of the regime switching between the lead and lag roles of the emerging market bonds vis-a-vis the media coverage.

Automated summary

This study applies wavelet analyses to examine the impact of the COVID-19 pandemic on emerging market bonds, considering both investment grade and high yield credit ranges. The results show varying levels of coherence between the Coronavirus Media Coverage index and the price movements of USD-denominated debt in emerging markets. The study attributes the periods of low coherence to the diversification potential of bonds issued by developing economies during a systemic pandemic like COVID-19. Furthermore, the study documents differences in patterns observed in option-adjusted spreads and total returns based on the credit quality of issuers from emerging market economies. The findings also reveal distinct zones of regime switching between the lead and lag roles of emerging market bonds in relation to media coverage.