Emerging market bonds: stable through the taper tantrum

Investors in global capital markets are on alert as the U.S. Federal Reserve looks to scale back its loose monetary policy. The taper tantrum of 2013 still has many investors spooked.

However, there are bright spots in the world of investment. Emerging market bonds are one of the few asset classes that have survived the pain of the taper tantrum unscathed. Despite the turmoil in the markets, emerging market bonds are holding their own as an attractive option for investors looking for yield.

In this article, we will take a close look at emerging market bonds and examine why they have survived the taper tantrum unscathed, and whether they will remain a solid choice for investors going forward.

What is the Taper Tantrum?

The taper tantrum is a term that refers to the financial crisis in 2013, when the U.S. Federal Reserve announced it would scale back quantitative easing. This has led to a massive selling of bonds in emerging markets and a collapse of currencies in those countries.

Since then, the term has taken on a general meaning, referring to any sudden and unplanned end to financial stimulus by central banks that can trigger a massive bond sell-off.

Recently, however, emerging market bonds have been spared from a taper tantrum. This is partly due to the positive performance of the global economy and the demand for resources from emerging markets to be invested.

  • However, emerging market bonds are still exposed to some risk, especially if there is a sudden change in central bank policy.
  • It is important that investors remain vigilant and diversify their investments to counter potential losses.
  • By carefully monitoring global financial markets, investors will be able to properly assess the risks of investing in emerging market bonds.

Nonetheless, the emerging market bond market remains a promising area for investors who are willing to diversify their portfolios and want to benefit from economic progress in emerging countries.

Why are emerging market bonds spared from taper tantrum?

Emerging market bonds have generally proven vulnerable to external shocks. Yet during the taper tantrum that occurred in 2013 when the U.S. Federal Reserve announced it would reduce its quantitative easing measures, emerging market bonds surprisingly remained quite stable.

There are several factors that contributed to this outcome. For one thing, most emerging markets had been in a relatively stable position at the time. They had implemented structural reforms and created a solid macroeconomic foundation to absorb capital flows. Second, emerging markets have increased their reserves to hedge against volatile capital flows. This allowed them to respond quickly and effectively to the inevitable capital outflows.

Last but not least, central banks around the world have coordinated their policies to stabilize global liquidity. The Federal Reserve, for example, has made it clear that it would be careful and gradual in its exit from quantitative easing. These measures have calmed markets and spared emerging market bonds from the taper tantrum.

  • Increase reserves
  • Establish a solid macroeconomic foundation
  • Coordinate central bank policy

Overall, it is fair to say that emerging market bonds are better protected from shocks than they were a few years ago. Although risks are present in all asset classes, emerging markets have increased their resilience to external shocks and are better positioned to respond to future challenges.

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