Second Wave of Rate Hikes Key to Get Emerging Bonds Rallying
Some of this year’s worst-performing emerging markets will get another chance to lure back bond investors after their first round of aggressive rate hikes failed to contain inflation.
At least seven countries including Russia, Mexico and India are set to follow Poland and Romania, which raised benchmark rates this week, with a combined 220 basis points of increases. These nations are suffering some of the worst losses in the local-currency bond market after January data showed consumer prices continued their upward march.
Time is running out for emerging markets to cool inflation and boost real returns, with just weeks to go before the Federal Reserve starts tightening and the European Central Bank is expected to make a hawkish pivot. While developing nations won traders’ praise for successive and proactive hikes last year, the latest price action in bonds suggests they must do more to avoid a bond selloff.
“Central banks have to hike more -- we should not fool ourselves,” said Christian Wietoska, a strategist at Deutsche Bank AG in London. “Inflation will remain well above target in most emerging markets, The expected base effects will not kick in and I think most central banks now realize that underlying inflation pressure is much more persistent.”
While a Bloomberg gauge of local-currency debt remains little changed this year, skirting a global bond rout, nations with stubborn inflation are witnessing losses. Russia’s central bank doubled borrowing costs last year, but that didn’t stop inflation surging to a six-year high. Ruble bonds have suffered the worst losses among peers in the index so far this year, and the Bank of Russia may lift rates by a whopping 100 basis points on Friday.