Graph of the week

Graph of the week

12-03-2021 | インサイト

Rising rates, no tantrum

  • Jaap  van der Hart
    van der Hart
    Equity Fund Manager
This past month we’ve been reminded again that rates don’t just fall... they rise too. The US 10-year bond yield increased in February to 1.5%, while it started the year below 1%. And that’ll take some getting used to. Since 2018, key global rates have been falling, and given that we’re in the middle of the Covid crisis, central banks are not planning any tightening measures any time soon. So a rise in rates came as somewhat of a surprise.

And when it comes to emerging markets, people are quick to link rising rates to 2013. During the aptly named ‘taper tantrum’, bond rates shot up after the Fed announced a gradual reduction in its volume of bond purchases. Another popular alliteration doing the rounds at the time was the ‘fragile five’. These were the emerging countries Brazil, South Africa, India, Indonesia and Turkey, who at the time were the most dependent on foreign capital. And that meant they were the hardest hit during the taper tantrum.

The question now is, are we in a similar situation? Well, not for the time being, at least. The economic situation has certainly changed notably over the last eight years. Deficits on the international balance of payments are lower in these countries, with some balances even having turned positive. The only factor that has deteriorated as a result of the Covid crisis is budget deficits. And that could definitely be an issue for Brazil, South Africa and India in particular.

Inflation is back

The impact of recent rate rises on emerging financial markets has not been significant up till now. Although the South African rand, the Brazilian real and the Turkish lira depreciated slightly last week, they are still higher than at the beginning of 2021. Yields and equity markets have also been slow to respond. Only in Brazil were investors unhappy, as President Bolsonaro replaced the CEO of state-owned oil company Petrobras, but that is a separate case.

So there is definitely no sign of any tantrum in emerging markets. One factor buoying the markets is that central banks worldwide are continuing to provide sufficient stimulus for now. Still, US bond yields did not of course rise for no reason. The factor generating greater attention right now is inflation. After years of absence, is it becoming relevant again?

Although CPI price indicators are calm for now, should we see rising commodity prices and the scarcity of many different types of computer chips as harbingers? Without a doubt, inflation rates will be coming under greater scrutiny going forward.


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