Why 5% Treasuries aren’t crushing emerging markets

{"text":[[{"start":4.114,"text":"The US is paying more than 5 per cent to sell 30-year bonds for the first time in decades. This is not much fun for Treasury secretary Scott Bessent. One might think it’s even less pleasant for his counterparts in emerging markets."}],[{"start":16.7,"text":"Classically, that would be true. In real, or inflation-adjusted terms, that 30-year Treasury yield is also the highest in a long time, at about 3 per cent. So is the real 10-year yield, at close to 2.5 per cent. When the returns on traditionally safe assets such as US bonds march higher, they usually suck some capital from riskier assets such as emerging-market bonds."}],[{"start":null,"text":"

"}],[{"start":38.9,"text":"Not this time, though. Owning emerging market bonds has not been so terrible in the past year. JPMorgan indices for both those in local currencies and those denominated in dollars are up about 8 to 9 per cent, in dollar terms, in the past 12 months, despite the Iran war shock. It helps that the dollar hasn’t strengthened on the back of higher returns available on US bonds."}],[{"start":60.08,"text":"Emerging markets are still relatively attractive investment destinations. Many of these markets have fought to lure investors with juicier real yields, setting policy rates well above inflation, since 2023 when US Treasury yields also rose a lot in real terms. Brazil’s 10-year bonds have a yield after local inflation of about 10 per cent; South Africa’s, around 4 per cent."}],[{"start":82.02,"text":"What’s more, emerging markets — at least taken in aggregate — have become relatively less risky by fixing their fiscal deficits. Ninety One, an emerging-market manager, makes the point by smooshing the countries in JPMorgan’s local currency index excluding China into a “Republic of EM”, and finds that this composite example of economic probity only outspends its tax revenue by 1 per cent of GDP, excluding interest costs."}],[{"start":106,"text":"And with the high rates in the US not crushing growth — yet — there is no reason to think that its imports of goods from emerging markets will fall. The US, meanwhile, is cruising for overspending of 2.6 per cent of GDP this year, according to the Congressional Budget Office."}],[{"start":118.62,"text":"Of course, aggregate figures mask divergence. Local currency yields in Thailand, South Korea and Malaysia are below the US in nominal and real terms — but then, these countries don’t need to attract as much capital from abroad. And as a diversified asset class, EM bonds don’t compare badly with the US."}],[{"start":137.42,"text":"High real rates are brutal for borrowers at home: Brazil’s spate of corporate bankruptcies points to that. But, at least, emerging markets have had some time to get used to them, and have kept their budgets mostly balanced to leave space to pay bondholders. That’s one lesson that Bessent will need to learn from capital-hungry emerging markets."}],[{"start":159.72,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1787886250_3921.mp3"}