Why EM Debt Investors Don't Worry About Rising US Rates

Some investors aren’t very concerned about Fed policy and rising US interest rates. That’s because history has shown that emerging-market debt (EMD) frequently posts positive returns even when US bond yields rise.

We demonstrated this by dividing the history of the 10-year US Treasury yield since 1993 into periods of rising and declining rates, based on changes of at least 100 basis points. We then calculated the cumulative returns for both hard-currency and local-currency EMD in each of the nine periods of rising yields.

We found only two sell-offs: in 1994 and in 2013, with the latter downturn corresponding to the “taper tantrum.” EMD enjoyed positive returns in the remaining seven periods.

We believe that the Fed hiking cycle of the mid-2000s is particularly relevant to investors today. That cycle most closely approximates the one we are experiencing now and will likely continue to see unfold in the coming years: slow and steady hiking in an environment of solid global growth. Those conditions proved to be very favorable for both hard- and local-currency EMD returns.

The takeaway? EMD investors should weigh today’s global growth backdrop, as well as other fundamental factors, which are much more important for EM than a gradual uptick in US interest rates.