"Higher-for-Longer mantra starts to weigh on emerging-market debt"

" Higher-for-Longer mantra starts to weigh on emerging-market debt \r\n\r\nEmerging-market central banks are joining their developed peers in pushing back against expectations of a rapid switch to cutting interest rates, souring the outlook for developing-nation bonds.\r\n\r\nTraders have all but priced out the prospect of easier monetary policy in Asia over the next 12 months, paring expectations for lower borrowing costs in Latin America and central Europe, swaps data show. The shift has been driven by the \u201chigher-for-longer\u201d rhetoric from the Federal Reserve, policymakers seeking to support their currencies and the threat of El Ni\u00f1o stoking inflation.\r\n\r\nThe growing global hawkishness spells more trouble for emerging-market local-currency bonds after traders thought central bankers from richer nations would soon start reducing rates as economies slowed. A Bloomberg gauge of the debt dropped 2% in August, the worst month since February, while an index of emerging-market currencies slipped 1.5%.\r\n\r\n\u201cThe inflation outlook for emerging markets is becoming less certain, in contrast to the broad-based disinflation of the past four-to-five months,\u201d said Jon Harrison, managing director for emerging-market macro strategy at GlobalData TS Lombard in London. \u201cEM local-currency bonds could also be at risk in the coming months from a further surge in the dollar or more Fed rate hikes, but we are not at that point yet.\u201d\r\n\r\n More Hawkish in Asia \r\n\r\nA hawkish trend is setting in across Asia. South Korea\u2019s central bank last month pledged to keep policy restrictive for \u201ca considerable time,\u201d convincing traders to price out a full 25 basis-point cut over the next year. Bank Indonesia said earlier in August it would allow short-term bond yields to rise to support the rupiah, adding to signs it\u2019s a long way from shifting to an easing stance.\r\n\r\nIndia\u2019s central bank said last week it\u2019s growing more concerned about surging food prices, prompting the market to pare earlier bets on aggressive rate cuts.\r\n\r\nSouth Korean swaps are now pricing in 8 basis points of rate hikes over the next 12 months, compared with predictions for a tiny cut at the end of June. Indian contracts are anticipating 16 basis points of cuts, down from a chunkier 60 basis points that were priced in on June 30.\r\n\r\n\u201cAcross regional Asian swap markets, the front-end of curves have gone from unwinding the pricing of rate cuts to now pricing up to a 25-basis-point increase by year-end,\u201d said Duncan Tan, a currency and rates strategist at DBS Bank Ltd. in Singapore.\r\n\r\n\u201cWhile there is probably low conviction among market participants for Asian central banks to hike again, the widening term premium suggests that participants see non-negligible risks of rate hikes starting again,\u201d he said. Term premium is the extra compensation investors require to take on the risk of changing interest rates.\r\n\r\n Brazil Exception \r\n\r\nLatin America is seeing a similar move toward more hawkish pricing, most noticeably in Chile, Mexico and Colombia. Only in Brazil has the market turned more dovish after the central bank cut its benchmark rate by a larger-than-expected 50 basis points on Aug. 2.\r\n\r\nPolicymakers in emerging Europe are likewise sounding more hawkish. Czech central bank Governor Ales Michl said last week inflation remained too high, and the discussions at Jackson Hole confirmed the nation\u2019s plan to keep monetary policy tight was the right strategy. Investors shouldn\u2019t assume further cuts will automatically continue, Hungary\u2019s central bank Deputy Governor Barnabas Virag also said last week.\r\n\r\n \u2018Bit of Pain\u2019\u00a0 \r\n\r\nMarkets may continue to be wrong-footed over the next three-to-six months as they likely view any weakness in data as a sign central banks can cut rates, said Bob Savage, head of markets strategy and insights at BNY Mellon Capital Markets in New York.\r\n\r\n\u201cThat\u2019s probably how the market\u2019s thinking, and that is absolutely opposite of how almost every central banker wants to think, which is: \u2018I want to beat inflation without actually doing anything,\u2019\u201d he said. \u201cThe easiest way of doing that is sounding tough and letting the market have a little bit of pain to do the work for me.\u201d"

"Higher-for-Longer mantra starts to weigh on emerging-market debt"

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