According to Bloomberg News, emerging local currency debt has slid 8.7% in the present year. Among the hardest hit are Turkey and Czech bonds in May on inflation. As inflation is spiraling across the globe, the emerging market bonds from Thailand to Turkey are feeling the wrath.
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Local currency debt from the developing nations, which is way more sensitive to domestic inflationary pressures of a country in comparison to dollar-denominated equivalents, has slid almost 9% in the current year, which is the most since at least 2008, as per the Bloomberg index. It is pretty unlikely that there will be any respite soon as the central banks worldwide are attempting to control escalating prices by increasing the interest rates aggressively, thereby risking growth by doing so. However, that was certainly not the plan to risk growth. Many developing nations showed the way by hiking rates last year, thereby going ahead of the policymakers in the United States with the hope of avoiding the 2013 taper tantrum. But with raging inflation in the United States and elsewhere with a strong dollar pressurizing currencies, these nations are making a rulebook anew. The policymakers are either signaling a longer campaign of surges across emerging countries or making a U-turn policy from the prevailing ways dovish ways. South Africa, Egypt, and the Philippines may hike interest rates soon.
Mounting losses
Bloomberg News reports that worries about inflation have also impacted the Turkish bonds. This month’s worst performers dropped 13%. But Czech bonds were already fighting the escalating price pressures and were the worst hit in May. A consistent 5.5 percentage point increase in rates since June did not suffice to tame the worst inflation in the country in almost thirty years. Thai bonds are down by 5.5%. These are the biggest losers this month and are susceptible to pressure for rate increases, inflation, and heavy bond issuance this year, as stated by a rates strategist Duncan Tan at DBS Group Holdings Ltd, Singapore.
Bloomberg News reports that oil prices were already at multi-year highs, with global demand growing alongside a rebound in the economy from the coronavirus pandemic. Crude escalated to as high as $130 per barrel, which is the highest since 2008, and as sanctions imposed on Russia following the Ukrainian invasion were threatening to shrink supply. Due to the ongoing war, natural gas prices are more than 100% higher in the current year as Russia is a big exporter of this commodity.
However, slowing expectations in growth, especially in China, are easing commodity price pressures, as per Lewis Jones, an emerging market debt portfolio manager at the William Blair Investment Management LLC, New York. He also said that with escalating laggards, these countries in Asia are catching up with their peers, and the rates of interest in the other regions of the developing world might be near their peak.
