Emerging markets (EM) assets have sold off since mid-April, in a move analysts say is reminiscent of the 2013 taper tantrum, according to a new report.
The Institute of International Finance (IIF) found that $5.6 billion has flowed out of emerging market bonds and stocks since just April 16. The sharp turnaround in positive flows that had gone to the asset class for most of the year was sharpest on April 23 as the U.S. 10-year Treasury note’s yield approached 3%, triggering a “reversal alert” from IIF.
“EM debt flows were hit particularly hard, in ways reminiscent of the taper tantrum in May 2013,” IIF’s Sonja Gibbs, Emre Tiftik and Fiona Nguyen said in the release. “This highlights the sensitivity of EM portfolio debt flows to U.S. rates. The main driver has been the breach of 3% by U.S. 10-year Treasury yields for the first time in over four years, in part reflecting concerns about the projected rise in the U.S. Federal budget deficit.”
The 2013 taper tantrum was a major investor pullback in emerging market stocks and bonds after the Federal Reserve announced it would begin to ease, or taper, its quantitative easing program and raise U.S. overnight interest rates from near 0%. EM assets saw massive outflows after the comments from then-Fed Chair Ben Bernanke with U.S. equities plunging and bond yields shooting higher.
The outflows from emerging markets this month have so far not been universal, IIF noted, as India and Korea saw sharper outflows, while Brazil attracted robust inflows to local stocks.
The organization said it expects EM investors to proceed with “a more discriminating approach over the rest of the year,” with countries that have high or rising debt levels being subject to greater scrutiny and increased likelihood of presenting downside risk. Analysts from IIF highlighted countries with high external financing needs such as Turkey, Poland, and Argentina that have more than $900 billion worth of EM bonds due through the end of 2018.
With U.S. 10-year Treasury note yields now slightly above the Fed’s long-term policy rate expectations, “a continued rise would likely be a significant headwind for EM flows,” IIF said in the release. “Combined with the projected adverse impact of the Fed balance sheet reduction on EM flows, our estimates suggest that a 100 basis point increase in U.S. short-term interest rates would reduce EM portfolio debt flows by around $43 billion in 2018.”
The EM pullback was reminiscent of February when non-resident investors pulled nearly $6 billion out of emerging markets stocks and bonds.