Emerging markets are weathering the global sell-off in bond markets better than developed world peers, as investors bet that many countries are now less vulnerable to the threat of higher US interest rates drawing capital away. Years of painful fiscal reforms, bolstering of central banks and finance ministries and a willingness to tackle inflation early by boosting interest rates have left many developing countries better able to withstand rising yields and a surging US dollar that might have triggered an emerging-market sell-off in the past. "Basically — a lot more resilient than you would otherwise guess," said Werner Gey van Pittius, co-chief investment officer for fixed income at Ninety One. "If I had told you at the start of the year that US Treasuries were going to go up 110 basis points, you would have said that EM is going to explode. And it hasn't." Yields on 10-year US Treasuries have surged from 4.8 per cent to 5.3 per cent in the past month.
Yet, in South Africa, Chile and other large developing nations, sovereign yields have risen much less and in some cases, such as Brazil, have fallen, reflecting a deep divergence between emerging and developed market bonds in recent years. Bond yields rise when their prices fall. "Fiscal discipline has arguably been stronger in emerging markets. They have been pretty good at increasing institutional credibility . . . how they handled inflation post-Covid has given people reassurance," said Eva Sun-Wai, portfolio manager at M&G.
Sovereign local currency bonds in emerging markets gained 18 per cent over the course of last year and were up 3.5 per cent this year to the end of August, according to a benchmark JPMorgan index. The global sell-off in September has left the index flat for the year to date. But that still marks a significant outperformance over developed-market bonds, which are down 4.5 per cent in the year to date, according to a Bloomberg benchmark index.
Source: Financial Times Markets · Summarized by HeadlinesBriefing