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Emerging markets have gone through rough times in the past four months, which is quite a change from last year when, as reported by the BIS, there was an unprecedented 22% increase in debt issuance in USD, according to William De Vijlder, Research Analyst at BNP Paribas.

Key Quotes

“Since 2013, debt in USD contracted by emerging market issuers, in particular corporates, has risen considerably so as to benefit from low US rates but at the risk of creating problems further down the road if the dollar were to rise. This is exactly was has happened as of late and the sudden strengthening of the dollar has become the proverbial straw that broke the camel’s back. Interestingly, rising US treasury yields as of the fall of 2017 initially did not cause a spread widening.”

“Sentiment started to deteriorate when market volatility in general picked up in February. More recently, the combination of dollar strength, rising US yields, concern about trade wars and specific issues in several countries (Turkey, election uncertainty in Brazil and Mexico, Russia, Argentina) created a kind of perfect storm, including contagion effects to other emerging countries. However it is worth emphasizing that the emerging corporate bond spread is still below the level reached after the taper tantrum in May 2013 when Ben Bernanke mentioned that at some point QE would need to be scaled back.”