Taper tantrum in US, rout in EM

As US bond yields continue their gradual but determined march upwards, some experts are already talking about a Second Taper Tantrum.  The possibility of such an event will increase, if Biden & Yellen team get their wish of a broad fiscal stimulus mandate from the Congress and the commodity complex continues to rally.  While robust growth in US is good for the global economy, EMs are already smarting from higher yields and a steady dollar.  A full fledged  Taper Tantrum could trigger a rout in EM, which already looks over-invested.


The recent rise in bond yields and U.S. inflation expectations has some investors wary that a repeat of the 2013 “taper tantrum” could be on the horizon.


The benchmark U.S. 10-year Treasury note climbed above 1.3% for the first time since February 2020 earlier this week, while the 30-year bond also hit its highest level for a year


The Fed and others have maintained supportive tones in recent policy meetings, vowing to keep financial conditions loose as the global economy looks to emerge from the Covid-19 pandemic.


However, the recent rise in yields suggests that some investors are starting to anticipate a tightening of policy sooner than anticipated to accommodate a potential rise in inflation.


With central bank support removed, bonds usually fall in price which sends yields higher. This can also spill over into stock markets as higher interest rates means more debt servicing for firms, causing traders to reassess the investing environment.


“The supportive stance from policymakers will likely remain in place until the vaccines have paved a way to some return to normality,” said Shane Balkham, chief investment officer at Beaufort Investment, in a research note this week, writes CNBC.com.


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The prospect of a strong economic rebound and hefty US stimulus has strategists at Goldman Sachs Group Inc. and money- managers at Amundi lending their voices to the bull case in the developing world. But the rout in Treasuries that these forces have unleashed should keep investors on their guard, according to JPMorgan Chase & Co, according to Bloomberg.


“If a particular allocation across the risky markets spectrum should be low confidence this year, it is the EM overweight,” JPMorgan’s John Normand wrote in a note to clients on Wednesday.


The danger for this notoriously volatile asset class is that inflation in the US is picking up again, and that’s driving benchmark rates higher. If the selloff runs further it could force investors who piled into higher-yielding securities in the developing world to head for the exit, as the relative appeal of holding them wanes.


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Has anyone investing in EM read the IIF report?


Governments and countries accumulated more debt during the COVID-19 pandemic than they did during the 2008-09 financial crisis, a leading trade group said on Wednesday.


The Institute of International Finance said global debt-to-GDP surged by 35 percentage points to over 355% in 2020, rising by $24 trillion to $281 trillion. The global debt ratio rose 10 percentage points in 2008 and by 15 points in 2009.


In emerging markets, China saw the biggest rise in debt ratios excluding banks, followed by Turkey, Korea, and the United Arab Emirates. South Africa and India recorded the largest increases just in terms of government debt ratios.



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“Premature withdrawal of supportive government measures could mean a surge in bankruptcies and a new wave of non-performing loans,” the IIF said.

February preliminary composite PMIs reveal US growing faster than EU and Japan, as faster vaccination and the prospect of massive monetary and fiscal stimulus add to expectations of a positive growth differential between US, EU and Japan. Such a scenario would certainly entail a stronger Dollar Index, as higher returns in the USA would attract financial flows.  Rapid growth in the US would also stoke inflation expectations, which would be more pronounced, if oil continues to rally, because oil prices and expectation formation have a strong positive correlation. Hence, even higher US 10-30 year bond yields can’t be ruled out by summer months.


Such a scenario would put immense BoP pressures on highly indebted Developing Nations ex-China.  The real pain of a US Taper Tantrum Mach-II can be felt in EM.



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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.