MacroscopeEM debt markets are both resilient and vulnerable
Countries with high levels of foreign participation in their domestic debt markets are more likely to face selling pressure when sentiment deteriorates
Investor sentiment towards emerging markets (EMs) has improved markedly over the past several weeks.
The stocks of developing economies have surged 9.5 per cent in dollar terms since the beginning of October - trimming their losses over the past three months to 4 per cent - while many of the most vulnerable currencies have risen against the dollar.
The Brazilian real, the worst-performing major EM currency has strengthened 6.5 per cent versus the greenback since September 23, while the Malaysian ringgit, another currency that has borne the brunt of the deterioration in sentiment towards EMs, is up 5.5 per cent since September 29.
The improvement in market conditions stems mainly from the perception among investors that a further delay in the tightening of US monetary policy may be beneficial for EM asset prices.
Yet without a recovery in commodity prices - Brent crude dropped 3 per cent on Monday following the release of third quarter GDP data for China which, although better than expected, threw the weakness of domestic demand into sharp relief - a meaningful and sustainable improvement in sentiment is unlikely.
All the more reason, then, for investors to take heart from the relative resilience of EM government bond markets.