LAUSR

We examine the determinants of corporate bond yields in emerging markets with a focus on the spillover of US monetary policy on corporate bond yields. We find that emerging market corporate bond yields are positively associated with the federal funds rate. However, there is evidence that this positive relation is transmitted through the domestic policy rate. If domestic policy rates are held constant, the spillover of US monetary policy on corporate bond yields diminishes. This suggests that domestic policymakers face a tradeoff: if they choose to leave their policy rate unchanged when the Fed hikes, this may have benign consequences for corporate bond yields. However, a relatively higher US policy rate may lead to exchange rate depreciation for emerging market currencies and thus elevated debt burdens for their US dollar debtors. Alternatively, if the Fed hikes and policymakers follow suit, funding conditions for corporates worsen through higher yields.