Emerging market debt during interest rate increase cycles: analysis for reserve managers

Luther Bryan Carter and Michael Cross

At the heart of reserve management is the principle that the safety and liquidity of the reserves come before their return objectives. Although in reserve management the “search for yield” is nothing new, a “requirement for yield” is. Years of declining yields on traditional reserve assets, in many cases to near zero or even negative, have forced reserve managers to rethink their tried and trusted methods. With zero or negative returns, merely holding sovereign bonds arguably no longer meets the “safety” criterion as capital is eroded.

As a result, reserve managers have looked elsewhere

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