Emerging markets safe despite bond vigilantes

Federal Reserve building'Bond vigilantes' are likely to cause volatility in Treasury yields despite the efforts of the US Federal Reserve to prepare the markets for tapering, but emerging markets probably won't be hit so hard this time around.

The claims come from Jan Dehn, head of research, and Gustavo Medeiros, portfolio manager, both from emerging market specialist Ashmore.

“The Fed’s power to influence the bond market has become very asymmetric,” they write. “The Fed is (almost) the only game in town when it comes to buying US Treasuries. In Q2, for example, the Fed was the only net buyer in the market. Therefore, rates can easily go up if the Fed stops buying.”

Even if the Fed tries a new strategy such as lowering its formal threshold for hiking interest rates to 6% unemployment, this will only be a verbal commitment, and bond investors may well choose to disregard it.

However, Dehn and Medeiros say emerging markets are better placed to weather the storm than they were in the summer, when emerging market bonds fell on fears that tapering was imminent.

“In brief, EM asset prices went down over the summer, but fundamentals improved,” says the research note.

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