For ETF investors, this means that emerging market local currency bond ETFs could be exposed to greater default risks. For instance, the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB), Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) and actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) all track emerging bonds denominated in their respective local currencies.

LEMB’s top country weights include South Korea 21.4%, Brazil 14.2%, Mexico 8.4%, Philippines 4.6% and Poland 4.6%. EMLC’s top country positions include Poland 9.3%, Mexico 8.6%, Malaysia 8.2%, Brazil 7.9% and South Africa 7.2%. ELD’s top country weights include Poland 11.3%, Mexico 9.9%, Brazil 9.8%, Malaysia 9.5% and South Korea 6.9%.

The authors calculated that a 10% rise in ratio of private foreign currency debt to GDP is associated with about a 30 basis point rise in sovereign local currency yields. If the private sector is highly mismatched, sovereigns would be loath to allow their currencies to further depreciate, and a government could be more inclined to default than inflate away their debt due to the effects of a depreciating currency on its private sector, according to the authors.

For more information on the fixed-income market, visit our bond ETFs category.

Max Chen contributed to this article.