Original Sin Redux

We explore the relationship between portfolio flows and financial conditions by using a unique and comprehensive database of US investor flows into emerging market government bonds. We find that mutual funds display a more procyclical pattern of flows relative to other investor types. Delving into the dynamics of portfolio flows at monthly frequency reveals that dollar appreciation amplifies the sell-off in EM local currency bonds, but not dollar-denominated bonds, possibly reflecting clientele effects of stickier investors toward dollar-denominated bonds. Our findings underscore how borrowing in domestic currency has not insulated emerging markets from fluctuations in global financial conditions.