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How Will Tapering Affect EM Bonds?


ERIC FINE: How tapering will affect emerging markets bonds is a very a frequent question I get. The elements of my answer are, number one: this has been discussed for a long time.  It has been on the front page of every financial newspaper for a period of time and I think it's substantially discounted. I was at the IMF annual meetings and everyone expected rates to rise.  Everyone was focused on the taper, so I think a good amount of it is priced in.


Number two: specific EM countries have had time to react.  A number of countries have raised interest rates by 200 basis points before there was any move by the Fed.  The Fed is guiding interest rates lower and they’re just reducing their intervention in the market. But they are also saying they want rates to be at a certain level.  


Number three: if interest rates are rising because of demand, that's a good thing.  It means we're going to be buying more flat glass from Mexico, more soybeans from Argentina so their currencies can come under upward pressure.


The last point I'll make is the taper will be a challenge for some emerging markets economies.  In general, I have the same attitude towards the emerging markets – I like some and I don't like others. There are a number of countries that have not hiked interest rates in anticipation of tapering or are just generally more vulnerable to rising rates.  South Africa comes to mind; Turkey comes to mind; India comes to mind.  I don't have a blanket answer that says the taper is just not an issue for EM, but I do think it's been priced in generally in terms of the U.S. bond market.  I think some countries have been able to react, and if the tapering's happening because of good final demand, because economies are growing, then that's a high-quality problem for EM countries.  We're buying more of their stuff, putting upward pressure on their currencies.


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