World Economy

EM Analysts Nervous About Rapid Rise in US Yield

Developing-nation assets erased their gains last week as the yield on the US benchmark 10-year treasury climbed toward 3%
Most vulnerable countries include Turkey (high current-account deficit) and nations such as Saudi Arabia that are pegged to the dollar.
Most vulnerable countries include Turkey (high current-account deficit) and nations such as Saudi Arabia that are pegged to the dollar.

Two months ago, when the US benchmark 10-year treasury yield was approaching 3%, most analysts were pretty sanguine about what it meant for emerging markets. This time around, it’s a different story, as concern ranging from the possibility of a trade war to geopolitical risks permeates markets.

Developing-nation assets erased their gains last week as the yield on the benchmark 10-year treasury climbed toward 3%. It rose further Monday, reaching a new 2018 peak of about 2.99%, the highest since January 2014, before paring the increase, Bloomberg reported.

The MSCI Emerging Markets Index of shares had its biggest two-day drop since March on Monday, while a gauge of developing-nation currencies fell to the lowest in three months.

Here’s what investors and analysts say about the impact of rising US yields:

Decelerating Growth

Greg Saichin, chief investment officer for emerging-market bonds at Allianz Global Investors in London:

- If growth decelerates, the combination of a rebounding US dollar and further rate hikes "may not be systemically good for EM," although its impact is secondary to emerging-market growth and oil prices

- "If rates continue to move up, I would be staying away from interest rate-sensitive credits in EM, usually all IG and relatively long duration"

More Negative News

Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute in Tokyo:

- “The difference between now and two months ago when the US 10-year yield approached 3% is that there is a lot more negative news now, including the trade friction between the US and China. The global economy doesn’t look like it will just keep expanding one way, and many of the emerging economies are export-dependent markets”

- At this point, the actual economic conditions remain strong if you look at the data, while the liquidity in the market stays ample. Doubt over bullish outlooks for global and emerging-market growth is rising. Therefore, this time around, gains in US yields may have a more significant impact on EM assets.

Psychological Level

Anders Faergemann, a senior fund manager at PineBridge Investments in London, which oversees about $85 billion in assets:

- “We don’t feel anything material has changed in the economy to warrant a major shift in our investment strategy. The momentum is behind the move for higher yields but in reality we are still in a range for US 10-year rates”

- Three percent is “more of a psychological level than a real technical level” so breaking 3% won’t alter our investment strategy. Breaking 3.05% will be a bigger signal especially if we break 3.23% in the 30-year area at the same time

- “Still, economic fundamentals have not changed significantly and my sense is that we are close to the peak in yields for the year as the US economy is growing at a decent pace, but not breakaway speed, and global inflation is likely to peak for the year over the next month or two as we have argued from the end of last year”

- China’s yields may be at least as important when it comes to emerging-market stocks.

Fear of Inflation

Per Hammarlund, chief emerging-markets strategist at SEB in Stockholm:

- The US 10-year yield at 3% is not by itself a problem for emerging-market assets, as long as the global and emerging-market growth outlook looks favorable. The problem for emerging-market currencies in particular is how fast US rates move to the level

- Fears of a rapid increase in inflation—driven by rising oil and energy prices—have taken hold and that is leading to a repricing of central bank and, in particular, US Federal Reserve policy. A significantly faster pace of monetary tightening could lead to a slowdown in global growth and that would hurt emerging markets disproportionately

Currencies Are Sensitive

Takahide Irimura, head of economic research in Tokyo at Mitsubishi UFJ Kokusai Asset Management Co.:

- “When US Treasury yields climbed at the beginning of this year, the dollar wasn’t rising and therefore the impact on the emerging currencies was limited. However, this time, the dollar has also been rising and we seem to have entered a period where emerging currencies are more sensitive to risk sentiment”

- The global economic momentum is not as strong as last year. PMIs show that they are still expanding, but at a moderate pace. The environment around emerging-market currencies doesn’t seem to be as strong as before

- “However, I don’t think this is the beginning of a bearish trend for emerging-markets assets”

- Macroeconomic situations in developing markets, including the current-account balances and external-balance sheets, have improved over the years, and they are on more solid footing than in 2013’s taper tantrum. The last year was probably one of the most ideal situations for emerging-market investment, in which the global economy was expanding, inflation wasn’t accelerating and the monetary policies of core countries were accommodative and the dollar was weakening

- Although such a golden period is over, the situation isn’t deteriorating much. So, emerging-market assets are still looking good, but investors are becoming more selective

Buy Sign

Anastasia Levashova, a fund manager at Blackfriars Asset Management in London:

- Treasury yield close to 3% is a buy sign for Russia and Greece

- Says most vulnerable countries include Turkey (high current-account deficit) and nations such as Saudi Arabia that are pegged to the dollar.

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