Title: Global Risk in Long-Term Sovereign Debt

Abstract: In this paper we uncover a novel investment strategy on sovereign bonds issued by emerging countries and denominated in local currency. We show that by allocating bonds into portfolios with respect to their co-movement with the Carry currency risk factor, investors obtain a large cross-section of dollar excess returns. We find that most of these returns represent compensation for aggregate global risk. A standard, no-arbitrage affine model of defaultable long-term bonds in local currency with global and country-specific shocks can replicate these findings if there is sufficient heterogeneity in exposure to global shocks, bond maturities are short enough, and the global component of default risk is sufficiently homogenous across countries.