What aggregate trends such as those shown in Figure 1 and Figure 2 obscure is the considerable variation that exists amongst EM debt markets. To illustrate this, it is useful to compare the total amount of domestic and international government securities outstanding at a given time. Figure 3 does so for the BIS sample of 22 EMs as of the end of 2011. We see that there are many differences amongst these countries in the relative amounts outstanding of domestic versus international bonds, and in the size of domestic sovereign bond markets.

The increase in the stock of EM debt has been accompanied by an increase in foreign demand. EM debt is now firmly institutionalized as a mainstream asset class<sup>2</sup> , as demonstrated by the rise in the global financial centers of investment funds with EM bond-specific asset management mandates, and sizable EM-dedicated capital markets sales, trading and research operations in global investment banks.

**Figure 3** : **Outstanding government securities of 22 EMs as of end-2011**

<!-- Start of picture text --> 70 International<br>Line of<br>bonds (USD<br>60 bn) equality PL<br>50<br>AR TR MX BR<br>40<br>RU<br>30<br>LB PN<br>HU<br>20 ID<br>SI SK PE CO<br>10 ZA<br>HR CN<br>CL MY<br>0 PK TH<br>1 10 100 1000 10000<br>Domesic bonds (USD bn) - log scale<br><!-- End of picture text -->

**Source: BIS**

**Note: A log scale for the x-axis has been used to improve the display (the value of domestic bonds outstanding increases exponentially with every unit increase along the x-axis).**

Yet despite their strong growth, emerging local currency bond markets remain small relative to those of the advanced economies, and to other asset classes. As of the end of 2011, the total value of the local currency government securities outstanding of the BIS sample of 22 EMs employed above was around US$4.7 trillion. While up sharply from only US$863 billion at the end of 1999, this is still equal to only about 13% of the US$37 trillion in domestic government securities of the 30 advanced economies tracked by BIS statistics, and roughly comparable to the value of the local currency government securities of France, Germany, and the United Kingdom combined (about US$5 trillion as of end-2011). The total bond market value of the six largest Southeast Asian economies (the ASEAN-6), at US$883 billion, is equivalent to about 7% of Japan’s.<sup>3</sup> Such aggregate statistics in fact exaggerate the investible universe for foreign investors, who may face restrictive regulations or taxes, and often have minimum liquidity requirements that exclude smaller markets and bond issues. The total market capitalization of the most widely followed EM local currency bond benchmark, the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified Index, was US$832 billion in mid-2012. This compares with nearly US$21 trillion for the equivalent JP Morgan developed market-only index (GBI-Global).<sup>4</sup> The combination of increased foreign investor interest and the still relatively small size of the EM local currency bond asset class has resulted in a sharp increase in the share of local currency EM bonds held by foreign investors. As is the case when examining broader trends in local currency bond market development, the degree and impact of this rise in foreign involvement differs widely across EMs.

Figure 4 illustrates the trend over the last decade for seven EM markets (and Australia, the United States and the United Kingdom, for comparison). This shows the rapid pace at which the foreign ownership stake of EM debt has risen, particularly since the financial crisis. The proportion of domestic, local currency government securities held by foreigners is now at historic highs in many EMs. Table 1 provides

> 2 This terminology is due to JP Morgan – see, for example, _EM Moves into the Mainstream as an Asset Class_ , JP Morgan (November 2010).

> 3 Source: Calculations based on data as of September 2011 from the _Asia Bond Monitor_ (April 2012), Asian Development Bank (p7, Table B). Note: comprises both corporate and sovereign bonds (though the latter predominate). 4 Market capitalization figures from JP Morgan.

**3**