A firmer dollar and rising US yields are fuelling a steady increase in money market rates across emerging economies where many central banks could be forced to raise interest rates to stem an investor exodus.
For a sector whose high growth rates and burgeoning consumer demand were th’e prime draw for trillions of dollars in investment, this effective tightening in monetary conditions, months before the US Federal Reserve even starts reducing its money-printing, could prove a huge blow.
The half-point rise since May in US Treasury yields, the benchmark against which all other assets are measured, has set in motion a process that Morgan Stanley analysts describe as a “malign rise in real interest rates” an exogenous policy tightening dictated by the Fed.
Markets are “mimicking the classic effects of a tightening of EM (emerging market) monetary policy”, Morgan Stanley told clients.
The latter effectively reverses the fall in borrowing costs that emerging markets experienced since early 2010.
A lot of bond issuers have not fully woken up to the fact that issuance at higher yields will signifi¬cantly change their debt sustain ability picture,” said David Hauner, head of Eemea fixed income strategy at B of A Merrill Lynch Global Research.
Analysts at JPMorgan note the impact of this retrenchment on money markets, as reflected on their Elmi Plus index, a weighted average of money market rates across emerging markets. Its yield leapt to a four year high of 5.33 percent the week before last.
The Elmi Plus average yield is at an elevated 4.16 per cent, versus 2.7 percent in early May, according to Andrew Szmulewicz, executive director in JPMorgan’s global research team.
Higher interbank rates are significant because they make banks reluctant to lend, and the rise in the cost of cash on these markets ultimately raises borrowing costs for consumers. In some markets such as Indonesia and Turkey, some of the liquidity squeeze is self-created – in Turkey for instance the central bank has tried to support the weakening lira by squeezing liquidity on interbank markets.