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Volatile US Treasuries spell trouble for emerging market debt

The Fed's data-dependence is clouding EM's mostly-benign cutting cycle outlook

Author

Paul Della Guardia
October 10, 2024 • Estimated Reading Time: 9 minutes

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In this edition:

  • Ethiopia bondholders reject government's $1 bln bond restructuring outline

  • Kazakhstan raises $1.5bn from return to dollar bond market after decade away

  • Amid Sanctions, Russian Oil Tankers Are Flying New Flags

  • And more…

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HEADLINE ROUNDUP

Sovereign Debt

  • 🇪🇹 Ethiopia:

    • Ethiopia Bondholders Say 18% Haircut Offer Isn’t Reasonable

    • Ethiopia bondholders reject government's $1 bln bond restructuring outline

  • 🇬🇭 Ghana:

    • Ghana Bondholders Overwhelmingly Support Debt Restructuring

    • Ghana to exit default after two years with debt restructuring

  • 🇹🇷 Turkey: Turkey raises $3.5bn in record international bond sale

  • 🇰🇿 Kazakhstan: Kazakhstan raises $1.5bn from return to dollar bond market after decade away

  • 🇸🇻 El Salvador: Invitation for Offers to Tender for Cash Any and All Notes

  • 🇲🇻 Maldives: Maldives nears first sovereign default on Islamic bonds

  • 🇸🇳 Senegal: Senegal's dollar bonds fall after audit reveals larger debt and deficit

  • 🇷🇸 Serbia: Serbia achieves first-ever investment grade rating

  • 🌍 Global:

    • EM sovereign bond issuance rises again in September

    • The Changing Dynamics of Global Debt

Geoeconomic Fragmentation

  • 🇺🇸 US:

    • The international economic implications of a second Trump presidency

    • The world according to Kamala Harris

  • 🇷🇺 Russia:

    • Is Russia’s shadow tanker fleet really circumnavigating oil sanctions?

    • Amid Sanctions, Russian Oil Tankers Are Flying New Flags

    • Mistaken Birthdate Could Allow Top Russian Spy To Slip Past Sanctions

  • 🇦🇪 UAE: Twenty-two rogue vessels banned from UAE waters in oil operations crackdown

  • 🇸🇦 Saudi Arabia: Saudi Minister Warns of $50 Oil as OPEC+ Members Flout Production Curbs

SPOTLIGHT

Volatile US Treasuries spell trouble for emerging markets debt

Investor expectations of Fed policy and the resulting impact on US Treasury yields is increasingly affecting emerging market debt, as markets lurch from one narrative to another in response to data releases.

Volatility in the US Treasury market has surged since last Friday’s blockbuster US non-farm payrolls report, with investors expecting the Fed to slow the rate-cutting cycle.

The strong print dashed hopes of a second large cut at the Fed’s meeting in November, which had risen in the wake of the landmark 50 basis point decrease on September 18th.

This reversal sent US 10-year Treasuries above the 4% mark, while also placing upward pressure on EM local currency yields so far in October.

This month, ten-year yields are trending higher in India, Indonesia, South Africa (despite a recent rate cut), Mexico, and Colombia. Only Brazil has seen its long-term borrowing costs decline, although these remain elevated.

Mixed picture: today’s US macro data release

Today’s US data release of headline CPI declining to 2.4% in September could place upward pressure on US Treasury yields, as it was above the consensus forecast of 2.3%.

Moreover, core inflation also came in above economists’ expectations, at 3.3%.

On the other hand, US unemployment insurance filings beat the forecast number by 30,000, having risen to 258,000. This is the largest weekly increase this year, supporting the case for monetary policy easing.

In early trading, the two-year Treasury yield has remained stable, at slightly above 4%.

EM and Treasury yields are tightly correlated

Since August, EM sovereign yield correlations to US Treasuries have increased.

Looking at this relationship over a three-month rolling window, this tighter link has benefited EM government issuers.

Indeed, their borrowing costs were declining until end-September, except in the case of Brazil (see first chart above).

And since October 3’s large NFP figure, all seven in-sample EMs have seen their weekly yield correlations to US Treasuries turn positive.

Moreover, 10-year local currency government bonds in Brazil, India, and Indonesia have recorded positive weekly correlations with 10-year Treasuries of 0.75 or above.

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GLOBAL ELECTIONS

Highlights

  • 🇲🇿 Mozambique: What are the key issues in Mozambique elections?

  • 🇹🇳 Tunisia: Tunisia’s Economy in the Eye of the Storm 

  • 🇸🇳 Senegal: Diomaye Faye asks the people for a bigger mandate

  • 🇲🇽 Mexico: Stagflation risk rears its ugly head in Mexico

The Big Picture

Looking back

Check out earlier updates for 2024 electoral results here and here.

SCRIBE’S CORNER

Events

  • 🇱🇰 2024-10-10: Sri Lanka Post-Election Webinar (Tellimer)

  • 🇨🇳 2024-10-17: China's economic troubles: Temporary woes or structural reckoning? (PIIE)

Resources

  • Course: Financial Programming and Policies, Part 2: Program Design (IMFx)

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