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Emerging Markets Offer Litmus Test for Traders’ Bold Rate Bets

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When it comes to betting on higher borrowing costs in the developing world, some investors may be getting ahead of themselves.

In markets from South Africa to Mexico and South Korea, traders are penciling in a faster pace of interest-rate hikes than what economists say is currently warranted based on the inflation outlook.

“Almost all of them are overpricing tightening,” said Shamaila Khan, the head of emerging-market debt at AllianceBernstein in New York, whose $4.7 billion high-yield bond fund has topped 86% of peers in the past year.

The positioning reflects a common motif in markets: After months of Covid-19 lockdowns there’s a risk that policy makers run their economies hot, only to backtrack with sharper-than-expected rate hikes down the line.

But the debate carries extra weight in emerging markets, an asset class that’s particularly sensitive to the Federal Reserve’s stance….

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