The Institute for International Finance said on Tuesday it is worried about the resiliency of emerging markets given how vulnerable the asset class has been to a “moderate rise” in global funding costs. The IIF, a global financial institutions association, said spillover from the sharp depreciation in the Turkish lira and the Argentine peso this year has so far been limited. However, it is worried that the near 20 percent slide for each currency so far in 2018 has come with an increase of just around 60 basis points in the benchmark U.S. 10-year Treasury note's yield.
“This leaves us worried how well the EM complex will digest a continued move higher in global funding costs,” the IIF research note said, referring to rising interest rates.
Non resident portfolio inflows in the last three years reached over 5 percent of gross domestic product in various emerging and frontier market countries including Argentina, Colombia, Mexico, South Africa, Egypt and Indonesia.
The emerging market aggregate hovered near 2.5 percent over the same time period according to the note, meaning the concentration in a few countries could prevent a larger contagion.
However, the IIF said, “we remain worried” about spillover because “the underlying driver of the sell-off is this year's rise in the 10-year Treasury yield from 2.4 to 3.0 percent.”
The level of non-resident portfolio flows to emerging markets has rebounded sharply since the selloff that followed the last time the U.S. central bank reversed course on its balance sheet policy in 2013, the so called taper tantrum.
That year the benchmark Treasury yield rose more than 100 basis points to end at 3.0 percent.
The Federal Reserve is expected to raise rates 25 basis points in its June meeting, leaving the Fed funds rate at 2.0 percent. At least one more rate hike is priced in this year.
The MSCI emerging market currency index fell as much as 4 percent on Monday from a record high hit in late March. On Tuesday, the index was up 0.69 percent, the most for any day since late January.
