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U.S, EMG Nations Are On Different Economic Cycles - Adding To Pressure

BySober Look
Published 07/05/2013, 04:29 AM
Updated 07/09/2023, 06:31 AM
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Emerging markets are under pressure once again. The Turkish lira is touching new lows, driven by a number of factors, including civil unrest in Egypt and more importantly rising rates in the U.S. Turkey also surprised investors with a higher than expected inflation reading of 8.3%.
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The Indian rupee touched a new low of 61. Currencies are weakening elsewhere in emerging markets, as capital flight continues.

Bond yields are moving up across the board, just when emerging markets nations can least afford it. The HSBC emerging markets composite PMI index hit the lowest level since 2009, showing stagnating growth in developing economies.
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What makes this particularly troubling is that the U.S. and emerging market nations are on a different economic cycle. As U.S. rates rise, many emerging nations in fact need interest rates that are stable or lower. Brazil for example does not need government bond yields above 11% right now. But that's exactly what the nation is dealing with for maturities longer than three years.

Moreover, liquidity in emerging market bonds has collapsed as market makers exited. Just as the case with U.S. corporate bonds, U.S. dealers no longer hold significant inventories of emerging markets bonds. At the same time, international investors' holdings of emerging market debt have been at historically high levels. Remember that most bonds don't trade on an exchange - they are over-the-counter products that require market makers for the market to function well. So when people call their broker to sell that emerging market bond ETF, there are not many people to buy the actual bonds on the other end. That makes selloffs sharp and disorderly, forcing more active investors to run for the exits.

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