Rising US yields loom over emerging markets in debt to the Fed

Photographer: Patricia Monteiro / Bloomberg

Soaring US Treasury yields are beginning to focus minds on the emerging market world.

Developing nations’ local currency bonds had their worst week since September in the five days through Friday, while dollar debt declined the most since January as rising inflation expectations drove a drop in Treasuries. . The sell-off in the world’s largest bond market also sent implied volatility in currencies and equities to the biggest weekly rise this year.

All eyes will be on Federal Reserve Chairman Jerome Powell’s testimony before Congress this week. The head of the central bank is ready to It echoes observations that policy makers are fully committed to supporting the economy. Investors will also look for any signs that you are concerned Higher long-term borrowing costs after real rates on long bonds rose above zero for the first time since June.

“We will still need to see the Fed greatly expanding its QE purchases, as the market simply cannot absorb the net issuance of US Treasuries later this year without much higher real returns, which would eventually be toxic to asset markets “, John Hardy. head of currency strategy at Saxo Bank in Hellerup, Denmark, wrote in a report. “Rising yields need not even necessarily trigger a noticeable collapse in risk sentiment, as long as the market is confident that real interest rates will continue to fall.”

Listen to EM: Powell’s weekly podcast to speak amid rising returns in the US.

A Bloomberg study in January found that all developing world currencies typically sell out when yields rise at a rate above about 25 basis points per month. The 10-year Treasury yield has risen 31 basis points this month since Monday’s first trading in London.