Indexes, currencies, and the political economy of sovereign bond market access

Inclusion in bond indexes improves emerging market (EM) government access to capital. Under what conditions do EMs enter indexes and gain the market access benefits? We find that borrower features affect index inclusion differently in domestic currency versus foreign currency bond contexts. In the higher-risk domestic currency bond context, indexes are designed to include only a small, low-risk subset of bonds, leading borrower political, institutional, and policy characteristics to significantly affect inclusion probability. In the lower-risk foreign currency bond context, indexes are designed to depict more of the market, so these same borrower features do not significantly affect inclusion probability. The study shows why EM entry into indexes and the corresponding access to capital vary across domestic currency and foreign currency bond markets, providing a nuanced picture of how contemporary sovereign debt markets operate. We provide historical index inclusion data for future research.