Emerging Market Debt Market Commentary - February 2021

Emerging market debt (in USD terms) experienced a difficult February as markets reacted to a sharp sell-off of US Treasury bonds that sent yields higher. Improving economic prospects, driven by positive vaccination developments, rising commodity prices indicating better demand, along with a reassessment of the size of the fiscal stimulus in the US, all contributed to real yields becoming the key driver of higher rates. There has also been a pick-up in cross market volatility despite improving US and global growth prospects that would ordinarily be expected to be supportive of risk assets. Moreover, higher commodity prices and vaccine-supported re-openings should benefit emerging markets (EM) – February saw overall positive flows of +$3.5bn and +$3.1bn into hard currency and local currency EM debt, respectively, even as market volatility may have unsettled investors about allocating capital into EM (source for flows: Morgan Stanley).