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South Africa: Emerging Markets’ Bonds Stand to Bear the Brunt of a Risk-Off Response to Global Inflation Fears

US bonds just keep on rising despite the US Fed again insisting this week that it doesn’t see inflation becoming a problem. A continuation in this vein spells bad news for emerging markets’ currencies and assets, with bonds likely to be worst hit by an erosion of their yield premiums in what has been a low-yielding investment world.

All eyes have been on rising US bond yields as fears of global inflation have prompted investors to anticipate an earlier-than-expected withdrawal of central bank support.

For South Africa and other emerging markets, the concern is that higher US bond yields could undermine risk-on investor appetite for emerging market assets. That could put paid to growing market consensus that 2021 could be a bumper year for developing countries, supported by a combination of robust global economic growth and low developed-market yields.

Since the start of the year, US 10-year Treasuries have added more than 50 basis points in response to rising inflation expectations. However, firm evidence of inflation rising is yet to come through and thus it’s a move that could well prove to be premature.

Investors are now seeing the Fed increasing interest rates for the first time in 2023 -…