EM bond market participants were braced for impact this week. Since Jerome Powell’s second term as US Federal Reserve chair was confirmed in November, all indications had been that the most influential central bank in the world would take a more aggressive approach to taming inflation, and this week’s Federal Open Markets Committee meeting duly brought the confirmation of faster tapering. Moreover, the suggestion that 2022 may bring not two but three rate hikes was even more hawkish than most were expecting.
But there was none of the carnage of which EM has lived in fear since the 2013 taper tantrum. In fact, there was a neat little rally, and the bonds of developing nations joined in the fun.
This reflects how well positioned the market was for the Fed’s shift, the idea of which has been carefully and gradually introduced — sometimes one word at a time — during the course of the year and shows how much has been learnt since eight years ago.
Whether this was the Fed’s intention or not, the biggest sigh of relief has come from the emerging markets — unlike 2013, when just the merest hint of the start of tapering wreaked havoc and some EM countries took years to recover.
Sure, 2021 has been a bumpy ride, and EM portfolio managers are licking their wounds. But then the return of inflation concerns in developed economies for the first time in decades was never going to make the EM bond market a happy place.
Most importantly, the process has been managed in such a way that EM central banks have had plenty of time to prepare. Moreover, capital markets — if far from being in impeccable shape — have remained largely open and constructive, ensuring that EM governments and companies could continue to finance themselves throughout.
Of course, the pain is not over. There’s no guarantee that inflation will be brought under control. China’s structural slowdown means EM growth is likely going to close in steadily on developed market rates — and that’s no good thing. Political challenges abound in Latin America and CEEMEA.
No doubt, there is plenty of turbulence ahead. But rather than a taper tantrum, EM is enduring a staggered slide into a sort of monetary stimulus melancholy. The asset class could hardly have asked for a softer landing from the Fed.