workflow-fi-sovereign-em

# Fixed Income: Sovereign and Emerging-Market Bond Analysis ## What this skill covers A four-phase analytical pipeline for sovereign fixed income: sovereign yield decomposition (credit, liquidity, FX), country risk premium derivation, EM hard- vs local-currency comparison, and capital-controls adjustment. Covers both investment-grade sovereigns and sub-investment-grade EM issuers. Every figure traces to an explicit tool call. ## Core Rules - Sovereign spread = sovereign yield − risk-free reference (US Treasury or relevant G10 benchmark at matched tenor). - Country risk premium (CRP) = market-implied sovereign default spread × (σ_equity / σ_bond); use `country_risk_premium` for derivation. - Hard-currency bonds priced in USD (or EUR); local-currency bonds carry additional FX risk — both must be compared on a currency-hedged and unhedged basis. - Capital-controls discount applies where repatriation restrictions limit realised yield; use `capital_controls` to quantify. - EM bond analysis benchmarks against EMBI Global spread (USD-denominated EM sovereign debt index, typically 250–450 bps over US Treasuries). ## Workflow ### Phase 1 — Sovereign Bond Pricing and Spread Decomposition 1. Collect sovereign bond inputs: - Issuer (country), bond type (Eurobond / local-currency / Brady), ISIN or CUSIP, coupon, maturity, settlement date, current yield or price. - Credit rating (Moody's / S&P / Fitch): retrieve from `moodys_credit_rating` or `sp_credit_rating` if subscription available; else from public rating source. 2. Pull the risk-free reference yield: - USD-denominated sovereign: use US Treasury at matched tenor from `fred_yield_curve` or `fmp_treasury_rates`. - EUR-denominated sovereign: use German Bund at matched tenor from `lseg_yield_curve`. 3. Call `sovereign_bond_analysis` with sovereign yield, risk-free yield, country rating, and bond characteristics. - Outputs: - **Sovereign spread** (sovereign yield − risk-free, in bps) - **Credit component** (rating-implied expected default loss) - **Liquidity component** (residual above credit component; thinly traded sovereigns carry 30–100 bps liquidity premium) - **FX component** (for local-currency bonds only; quantified by CDS-implied credit vs yield spread gap) - Decomposition check: credit + liquidity + FX component = sovereign spread ± 5 bps. 4. Compare to EMBI Global or EMBIG-D benchmark spread: `fred_spread` (series BAMLEMCBPIOAS for EM corporate, or equivalent EMBI series) or `lseg_credit_spreads`. ### Phase 2 — Country Risk Premium Derivation 5. Call `country_risk_premium` with: - Country sovereign CDS spread (5Y USD CDS) — source from `lseg_credit_spreads` or `sp_credit_rating` - Local equity market volatility (σ_equity) — annualised; source from market data - Local bond market volatility (σ_bond) — annualised; source from `lseg_bond_pricing` or historical price series - Base equity risk premium (e.g., US ERP from `fmp_market_risk_premium`) - Outputs: **country risk premium (CRP)**, **total equity risk premium for country** = Base ERP + CRP. 6. Interpret CRP: - Investment-grade EM (e.g., Chile, Mexico): CRP typically 100–200 bps - Sub-investment-grade EM (e.g., Nigeria, Pakistan): CRP typically 300–600 bps - Distressed / default-adjacent: CRP > 800 bps; flag credit event risk 7. Document political risk and macro context: - Pull governance indicators: `wb_governance` (World Bank WGI — political stability, rule of law, control of corruption) - Pull macro fundamentals: `wb_country_indicators` (GDP growth, current account, external debt / GDP, FX reserves) - Note any ACLED conflict events: `acled_country_summary` (conflict frequency and fatalities as political risk proxy) ### Phase 3 — Hard-Currency vs Local-Currency Comparison 8. For the same issuer with both hard (USD) and local-currency bonds: a. Hard-currency bond: price with `sovereign_bond_analysis` as in Phase 1 — yield is USD yield with no FX exposure to the investor (if held to maturity); FX exposure only affects mark-to-market if sovereign devalues and bond trades at a discount. b. Local-currency bond: call `em_bond_analysis` with: - Local currency bond yield (in local currency terms) - Current FX spot rate (local / USD) - Forward FX rate at bond maturity (from `fx_forward` if available, else compute from interest rate parity: F = S × (1 + USD rate) / (1 + local rate)) - Outputs: **local-currency YTM**, **USD-hedged YTM** (YTM adjusted for forward FX cost), **carry advantage or disadvantage**, **break-even FX depreciation** (max depreciation where local-currency bond still matches hard-currency bond return). 9. Present a hard-vs-local comparison table (see Output format). 10. Capital-controls adjustment (if applicable): - Call `capital_controls` with country, instrument type, and restriction type (repatriation limits, withholding tax). - Outputs: **effective yield haircut from capital controls** (bps), **onshore vs offshore yield differential**, **break-even holding period**. - If capital controls apply: local-currency effective yield = local YTM − capital controls haircut. ### Phase 4 — Investment Recommendation Structure 11. Summarise with a structured view: - Relative value vs EMBI benchmark (cheap / rich / fair) - Hard vs local currency recommendation with rationale - Key macro and political risks with quantified impact (spread widening scenario from `scenario_analysis`) - Near-term catalysts: rate decisions, IMF review dates, election calendar from `wb_country` or `fmp_economic_calendar` ## Output Format **Sovereign Bond Summary** | Metric | Value | |---|---| | Sovereign yield | XX.XX% | | Risk-free reference yield | XX.XX% | | Sovereign spread | +XXX bps | | Credit component | +XXX bps | | Liquidity component | +XX bps | | Country risk premium (CRP) | +XXX bps | | EMBI benchmark spread | +XXX bps | | Relative to EMBI | +/− XX bps (Xth pctile) | **Hard vs Local Currency Comparison** | Metric | Hard (USD) | Local (hedged) | Local (unhedged) | |---|---|---|---| | Yield | XX.XX% | XX.XX% | XX.XX% | | FX hedge cost | — | −X.XX% | — | | Capital controls haircut | — | −X.XX% | −X.XX% | | Net effective yield | XX.XX% | XX.XX% | XX.XX% | | Break-even FX depreciation | — | — | −XX.X% | **Country Risk Profile** | Indicator | Value | Percentile | |---|---|---| | WB Political Stability | X.XX | XX th | | WB Rule of Law | X.XX | XX th | | External debt / GDP | XX% | — | | FX reserves (months import cover) | X.X | — | | CRP | +XXX bps | — | **Tool-Call Traceability Table** | # | Tool | Key Inputs | Output | |---|---|---|---| | 1 | `fred_yield_curve` | as-of date | US risk-free curve | | 2 | `sovereign_bond_analysis` | sovereign yield, risk-free, rating | spread decomposition | | 3 | `country_risk_premium` | CDS spread, σ_equity, σ_bond | CRP | | 4 | `em_bond_analysis` | local yield, FX spot/forward | hedged/unhedged yield | | 5 | `capital_controls` | country, instrument | effective yield haircut | | 6 | `wb_governance` | country | WGI scores | | 7 | `acled_country_summary` | country, date range | conflict events | ## Quality Gates - [ ] Spread decomposition: credit + liquidity ± FX = sovereign spread (±5 bps) - [ ] CRP derivation uses tool output; σ_equity and σ_bond stated with source - [ ] Hard-vs-local comparison on same as-of date with consistent FX forward rate - [ ] Capital controls discount applied where restrictions exist; zero stated explicitly if no restrictions - [ ] Break-even FX depreciation computed for local-currency bond - [ ] EMBI benchmark spread cited and relative positioning stated - [ ] Political risk and macro fundamentals documented (WB WGI + macro ratios) ## Related Skills - `workflow-fi-bond-valuation` — plain-vanilla bond pricing prior to spread computation - `workflow-fi-credit-spreads` — corporate credit spread methodology (same spread decomposition framework) - `workflow-fi-yield-curve-construction` — US risk-free curve construction - `corp-finance-analyst-fixed-income` — deeper EM analysis (political risk, capital controls, EM equity premium) - `corp-finance-analyst-regulatory` — country risk assessment for regulatory capital (Basel III sovereign risk weights)