The View | How emerging markets are paying the price of skittish bond investors
Nicholas Spiro says debt investors are being unduly pessimistic about the impact of the US Federal Reserve’s interest rate hikes
Despite four rate hikes between December 2016 and December 2017, financial conditions – a gauge of how stimulative markets are for economic growth – became looser, the opposite of the intended effect. Last year, the dollar index (a measure of the performance of the greenback against a basket of its peers) tumbled by nearly 10 per cent while the benchmark 10-year Treasury yield barely budged.
In a sign of the extent to which markets disbelieved the Fed’s increasingly hawkish stance, emerging markets’ bond and equity funds attracted a record US$200 billion of inflows last year, according to JPMorgan.
This year, however, the predictions of the Fed and those of the bond market have converged significantly, so much so that investors are anticipating a sharper tightening in monetary policy than the Fed itself. According to Fed funds futures, which are contracts that investors and traders use to bet on movements in rates, markets see a slightly higher chance of three more rate hikes this year, as opposed to the two additional increases forecast by the Fed.