Emerging market debt (in USD terms) experienced a tepid start to 2022 as a sell-off in US Treasuries put pressure on a range of risk assets. This included EM local rates, depressing both local and hard currency returns. Concerns around the severity of the Omicron variant eased as the hospitalisation rates are comparatively low relative to previous variants. Mobility restrictions due to surging Omicron cases were still a feature though as India, Thailand and Philippines imposed some constraints. Idiosyncratic geopolitical risks — especially around the Russia/Ukraine situation — remain elevated and contributed to a widening of spreads; the local yields for Russian and some eastern European countries’ government debt moved higher.
The US Federal Reserve doubled its planned tapering of Treasury and Agency MBS purchases to $30bn at its January meeting and asset purchases are expected to end in early March. US rates sold off amid high US inflation (7% December CPI, year-on-year) and expectations of a more aggressive rate hike schedule than initially expected. Spreads of hard currency EM debt increased amid discouraging news flow around Russia/Ukraine and concerns about debt servicing capabilities of frontier EM countries. But with higher real rates and hawkish EM central banks, many EM countries seem reasonably well positioned to overcome domestic inflation and FX instability amid higher US rates. During January, hard currency outflows amounted to -$3.9bn, while local currency inflows were $1.3bn. (source: JP Morgan).