Inter Berner Dubois Analysts Report on ‘Emerging Markets Increase Interest Rates from Pandemic Lows’

MONTREAL, QUEBEC, CA Inter Berner Dubois analysts have reported that emerging-market central banks have increased interest rates from their pandemic lows of last year. This proactive tightening is beginning to pay off in increased local bond returns.

An index of debt issued by developing countries denominated in their own currencies has returned around 1% over the past three months, while a comparable measure of hard currency bonds has dropped 2.9%, according to data obtained by researchers at Inter Berner Dubois.

The outperformance stems from the belief that the proactive central-bank policy was sufficient to get ahead of inflation, implying that additional tightening would now be less necessary into 2022. Investors are drawn to local debt due to improving economic circumstances as the global recovery takes hold.

“Our fixed investments team has been slowly adding back to our local-currency bond exposure as valuations have become more appealing, current accounts have significantly improved, and many emerging central banks pre-emptively tightened monetary policy,” said Richard Palmer, Director of Asset Management at Inter Berner Dubois. “Due to the current volatility we are experiencing, we are advising our clients to stay diversified at this time.”

Over the last 12 months, policymakers in emerging markets, particularly Latin America, have gone on a tightening frenzy to contain inflation sufficiently. In 2021, 12 of the 20 largest developing-nation central banks raised interest rates by a combined total of 2,300 basis points, according to Inter Berner Dubois market intelligence. That strengthened rate premiums throughout the developing world and boosted the attraction for emerging-market assets.

“Emerging-market central banks have already reacted to the rise in inflation following the Covid growth downturn, and the tightening of monetary policy conditions, particularly in Latin America, has almost come to a close,” further added Palmer. “From a forward-looking perspective, we estimate inflation will decline and converge toward official central bank inflation objectives, obviating the need for further monetary policy tightening.”

While local-currency bonds have largely outperformed, their dollar-denominated counterparts have been placed under pressure by the Federal Reserve’s impending tightening. The U.S. central bank has become increasingly aggressive in recent weeks, with markets pricing in a first rate rise as early as March.

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SOURCE: Inter Berner Dubois