The performance of local emerging market debt portfolios has historically been relatively closely negatively correlated with changes in the US 10-year treasury yield. For example, the drop in US 10-year yield during 2020 COVID pandemic preceded rally in local EM debt. Subsequently, rise in US inflation and interest rates in 2022 triggered a selloff across EM markets.
After peaking at almost 5% in October 2023 the subsequent 100 bps decline in US 10-year yield resulted in only relatively modest recovery in local EM, which quickly lost pace after reinforcing of higher-for-longer US rate path. This latest development demonstrates that the relationship between US 10-year treasury yield and EM debt performance is much more complex and multifaceted. It involves factors such as economic conditions, risk appetite, overall interest rate differentials and FX dynamics, including terms of trade ratio of EM’s export versus import prices.
