The US Federal Reserve has been gearing up to slow the pace of its bond purchases. But unlike the Taper Tantrum of 2013 that saw an outsized negative impact on emerging market debt, the Fed’s more careful communication this time around makes it unlikely that today’s more resilient emerging bond markets will experience the same fallout.
A recurring theme in our recent conversations with investors is the tapering of the US Federal Reserve’s quantitative easing (QE) programme. It is widely expected that the Fed will start reducing its monthly purchases before the end of this year with the programme concluding around the middle of 2022. For investors in emerging market (EM) debt, this is an especially acute concern as EM debt performance depends to a great extent on the broader macro backdrop, with the monetary policies of developed markets central banks, and the Fed in particular, key factors in this. Furthermore, the memory of the “taper tantrum” in the summer of 2013 is still fresh in the mind of many EM investors; at the time, then Fed Chairman Ben Bernanke’s unexpected QE tapering announcement led to a significant sell-off in both EM Local and Hard Currency debt, which lost 14.3% and 9.6%, respectively, over the course of four months.¹ However, we believe this time is different for a number of reasons.