Increasing US yields hover over emerging markets in debt to the Fed

Photographer: Patricia Monteiro / Bloomberg

The growing yields of the US Treasury are beginning to focus minds in the world of emerging markets.

Local currency bonds from developing countries had their worst week since September, in the last five days until Friday, while dollar debt fell since January, with rising inflation expectations fueling a defeat in Treasury bonds. Settlement in the largest bond market in the world also sent the underlying volatility of currencies and shares to the biggest weekly increase this year.

All eyes will be on the testimony of Federal Reserve Chairman Jerome Powell to Congress this week. The head of the central bank is set to Echo notes that policymakers are fully committed to supporting the economy. Investors will also look for any signs that he is concerned about steeper long-term borrowing costs after real long bond rates rose above zero for the first time since June.

“We will still need to see the Fed broadly expanding its QE purchases, as the market simply cannot absorb the US Treasury’s net issuance later this year without much higher real yields, which would end up being toxic to the asset markets,” John Hardy, the head of foreign exchange strategy at Saxo Bank in Hellerup, Denmark, wrote in a report. “Rising yields do not necessarily need to trigger any noticeable downturn in risk sentiment, as long as the market is comfortable that real interest rates will continue to fall.”

Listen to EM: Powell’s weekly podcast to speak amid rising US earnings

A Bloomberg study in January found that all currencies in developing countries typically sell when yields jump at a rate greater than about 25 basis points per month. The 10-year Treasury yield rose 31 basis points this month at the start of London’s trading on Monday.