Foreign holdings of emerging markets (EMs) government bonds have increased
substantially over the last decade. While foreign participation in local-currency sovereign
bond markets provides an additional source of financing and reduces sovereign yields, it
raises concerns about increased sensitivity of yields to shifts in market sentiment. The
analysis in this paper suggests that foreign participation and an undiversified investor base
transmit global financial shocks to local-currency sovereign bond markets by increasing
yield volatility and, beyond a certain threshold, amplify these spillovers. These estimates are
robust to a range of econometric techniques including panel smooth threshold regression.