Local emerging markets debt in the face of rising US long term rates

The upturn in the US 10-year interest rate has been a source of utmost concern for many asset classes. In this research, we focus on the impact of this phenomenon on local emerging debt. We start by reviewing recent movements in the emerging currencies, which are underperforming their G10 counterparts as well as commodity prices, and consider the growth and inflation outlooks, which are quite disparate for this year. The rise in US interest rates has obviously impacted emerging debts at least as much as the debts of developed countries, and has already led to a decline in capital inflows into emerging countries, down from the record highs observed at the end of 2020 and at the start of 2021. Emerging debts will remain under pressure for as long as US interest rates do not at least mark something of a pause. In this environment, we then consider the upturn in US long rates by estimating in which countries the 10-year interest rate is most sensitive to the US 10-year rate, so as to construct a spread indicator adjusted for this sensitivity, the intention being to identify local opportunities, in particular a basket of defensive local debts in the face of rising US long rates. We then delve deeper into the reflation theme (at the origin of the rise in US long rates) in each geography (Latin America, Asia, CEEMEA) from different angles, being: linkers in Latin America, 2Y-10Y slope in Asia, as well as the current account balance and FX volatility in the CEEMEA zone. Finally, we set out systematic relative value opportunities for the curve of emerging countries based on a Principal Component Analysis (PCA).