Emerging Market Bonds & The Dollar
The yield gap, or spread, between emerging market bonds and U.S. Treasury notes is at 3.49 percentage points, within 0.13 percentage point of its narrowest since January 1998, according to JPMorgan Chase & Co.'s Emerging Market Bond Index. The gap has narrowed from a peak of 10.40 percentage points in November 2001. Some analysts predict it will narrow to between 3 and 3.25 percentage points by the end of this year.
A sudden decline in the dollar could spark an unexpectedly sharp rise in US interest rates, which would prompt investors to demand higher returns on risky debt. This could fuel turbulence in emerging market bond prices, which last year rallied strongly. Emerging markets have not had to contend with a sharp rise in US rates since 1994, when yield spreads over US Treasury bonds widened dramatically.
A sudden decline in the dollar could spark an unexpectedly sharp rise in US interest rates, which would prompt investors to demand higher returns on risky debt. This could fuel turbulence in emerging market bond prices, which last year rallied strongly. Emerging markets have not had to contend with a sharp rise in US rates since 1994, when yield spreads over US Treasury bonds widened dramatically.
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