2022年1月29日

Is the honeymoon over in emerging markets as the pressure on U.S. debt spreads?

China News Service Beijing on March 10 After nearly half a year of investment “honeymoon period”, emerging markets are facing a test of pressure. Last week, emerging markets saw their first net outflow of international funds since October, as 10-year US Treasury yields continued to rise.

Emerging market inflows were about $325m a day in February, but last week saw a turning point: outflows of about $290m a day, the first one-day outflow in nearly half a year, according to the Institute of International Finance’s daily cross-border fund flows report. In the past few months, emerging market investment is the “hot property” of international capital, attracting more money at a record speed.

“The positive momentum of capital inflows in early 2021 has waned. “Awakening concerns about the US inflation cycle, coupled with asset market rotation, are limiting capital flows to emerging markets and increasing downside risks.” So explains the IIF in its report.

The IIF said the recent rise in Treasury yields had magnified the “taper tantrum” sentiment, which could hurt future flows into emerging markets. The net outflow of international money from emerging market equities and bonds in the last two weeks has revealed investors’ concerns.

“The accelerating recovery in the US economy is attracting global money back. Coupled with less risk aversion among investors, higher Treasury yields strengthened the dollar, which added to the pressure on emerging markets.” “Said RobinBrooks, the IIF’s chief economist.

Industry analysts point out that similar assets in emerging markets typically offer higher returns and higher risks than those in developed markets. When yields on developed market assets rise significantly, this may make emerging market assets less attractive. The recent rise in U.S. bond yields has exacerbated the tension.

But that may be just the tip of the iceberg. Many Wall Street analysts also said U.S. officials, including Federal Reserve Chairman Jerome Powell, have repeatedly said policy is expected to remain accommodative until U.S. employment and other problems are effectively alleviated, and played down investor concerns about rising Treasury yields. The comments disappointed investors who had been waiting for the Fed to intervene in the bond market and reinforced expectations that Treasury yields would continue to rise.

Chen Fengying, a researcher at the China Institutes of Contemporary International Relations, said international capital flows have always been closely linked to the dollar’s movements. Since May last year, the United States has implemented unlimited quantitative easing, which has caused the dollar index to fall. The capital flow seeking higher returns has stimulated the capital flow to emerging markets to some extent, but at present, if the dollar continues to strengthen, it will form a certain suppression on emerging markets.

As a result, capital flow has become a real pressure emerging markets have to face. “Just 10 days ago, investors thought a US rate rise would be a piece of cake for emerging markets, but the pendulum is turning. If US interest rates continue to rise, emerging markets will be hit hard.” RobinBrooks said.

Rising interest rates on U.S. debt are making emerging markets increasingly dangerous, according to Man Group, a leading global hedge fund. Big financial firms such as BlackRock have also sounded the alarm on the outlook for emerging-market debt, suggesting the market’s fears will not end abruptly. Analysts said the outflow trend could continue in the short term.

For now, market investors are waiting to see the direction of Fed policy. But no matter what the Fed does, there is no denying that money flows into emerging markets have slowed. Flows into emerging-market equities and bonds fell sharply to $31.2 billion in February from a record $76.5 billion in November, according to IIF data. (after)

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