The J.P. Morgan GBI-EM Global Diversified local-currency index fell 0.94% in U.S. dollar terms in the third quarter as U.S. yields rose and emerging-market central banks diverged.
State Street Investment Management reported the index’s loss in its third-quarter commentary. The index yield reached 6.54% by Sept. 30, up 44 basis points over the quarter. State Street said U.S. rate repricing affected emerging-market bond duration. The 10-year U.S. Treasury yield climbed 82 basis points to 5.28%, a shift State Street said affected emerging-market bond duration.
The Federal Reserve raised its target range by 25 basis points to 3.75%-4% on Sept. 16, with the new range taking effect the next day. The move did not produce a uniform policy response across emerging markets. Banco Central do Brasil (BCB) cut its Selic target to 13.75%, effective Sept. 17, while the South African Reserve Bank raised its policy rate by 25 basis points to 7.25%, effective Sept. 25. Banco de México held its policy rate at 6.50% on Sept. 24 after cuts earlier in the year.
In an Oct. 6 outlook, State Street linked policymakers’ room to wait to inflation being more firmly anchored and stronger policy credibility in several emerging economies. The firm also described their fiscal positions as comparatively sound and said rate increases from earlier periods could leave borrowing costs restrictive as inflation eased. It said broad rate hikes appeared unlikely, although currency pressure, weak policy credibility or low foreign-exchange reserves could push some central banks toward tighter policy.
The different paths affect bondholders through both interest and currency returns. State Street said higher starting yields can support income, while U.S. dollar strength could weaken local currencies and prompt some central banks to raise rates. The firm compared current conditions with 2021-22, when emerging-market central banks raised rates during a Fed tightening cycle and dollar strength deepened losses for U.S. dollar investors.
The Fed’s next policy meeting is scheduled for Tuesday-Wednesday, Oct. 27-28.
