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Surging U.S. Yields Loom Over Emerging Markets Beholden to Fed

(Bloomberg) — Rising U.S. Treasury yields are starting to concentrate minds in the world of emerging markets.Developing-nation local-currency notes had their worst week since September in the five days through Friday, while dollar debt declined by the most since January as surging inflation expectations fueled a rout in Treasuries. The selloff in the world’s largest bond market also sent implied volatility for currencies and stocks to the biggest weekly jump of 2021.All eyes will be on Federal Reserve Chair Jerome Powell’s testimony to Congress this week. The central bank chief is set to echo remarks that policy makers are fully committed to supporting the economy. Investors will also look for any sign that he’s troubled by steeper long-term borrowing costs after the real rates on long bonds rose above zero for the first time since June.“We will still need to see the Fed vastly expanding its QE purchases, as the market simply can’t absorb the net U.S. Treasury issuance later this year without much higher real yields, which would eventually be toxic for asset markets,” John Hardy, head of FX strategy at Saxo Bank in Hellerup, Denmark, wrote in a report. “Rising yields don’t even necessarily have to trigger any notable meltdown in risk sentiment as long as the market is comfortable that real interest rates will continue to decline.”A Bloomberg study in January found all developing-world currencies typically sell off when yields jump at a rate greater than about 25 basis points per month. The 10-year Treasury yield has risen by 27 basis points this month through Friday.Oil will also keep traders on their toes, with Saudi Arabia and Russia differing once again on their output strategy heading into an OPEC+ meeting. The Mexican peso, Colombian peso and Russian ruble were among the worst performers in emerging markets as Brent crude retreated on Friday.“Our optimistic emerging-market currency outlook is not without risks of setbacks along the way,” Ehsan Khoman, the Dubai-based head of emerging-market research in Europe, the Middle East and Africa at MUFG Bank. “By and large, we believe relative cyclical outperformance and attractive yields on offer continue to favor stronger EM currencies as Covid-19 ebbs.”South Korea and HungaryThe Bank of Korea will probably stand pat by unanimous consensus on ThursdayThe most interesting aspect of the meeting could be any signals on government debt purchases. Lawmakers are planning to draw up another supplementary budget in the coming weeks — with the potential for additional debt issuance likely to put upward pressure on yieldsThe BOK would opt to use ad-hoc debt purchases to counter any bond market volatility rather than shift to a full-fledged quantitative-easing program, according to Bloomberg Economics Korean 10-year bond yields rose around 9 basis points last week, mirroring the moves in U.S. yieldsHungary will probably keep its base rate at 0.6% on Tuesday, with the forint among the worst performers in emerging markets this monthThe central bank had developed a reputation for being one of Europe’s most dovish before the coronavirus pandemic. Now, it’s among the strictest, pursuing caution to prevent volatility in financial markets and inflationPolicy CluesIn Brazil, swap rates traders will watch a mid-February reading of consumer price inflation on Wednesday, which probably accelerated on an annual basis, underscoring bets on a rate hike in MarchInvestors will also monitor the congressional debate surrounding the 2021 budget and prospects for another round of cash handoutsJanuary current-account data on Wednesday and unemployment and primary budget balance figures on Friday could offer further signs of the pandemic’s impactPresident Jair Bolsonaro said more changes are underway after naming a former general to replace the University of Chicago-educated economist running state-controlled Petroleo Brasileiro SAMexico’s mid-month inflation data, scheduled for Wednesday, will be scrutinized after January consumer prices topped expectationsPolicy makers will release the minutes from their February meeting on Thursday, which investors will monitor for clues on the central bank’s next steps after a unanimous decision to cut rates by 25 basis pointsOn the same day, the country will release a reading of December economic activity and January unemploymentMalaysian January CPI on Wednesday is expected to remain in negative territoryThe January trade balance is likely to remain in strong surplus in data to be released on FridayRinggit was stock-still last week — buffeted between opposing forces of strong dollar and robust oil prices as a net exporter of energySouth African BudgetSouth Africa’s Finance Minister Tito Mboweni will present the 2021-2022 budget on WednesdayMboweni must convince investors he has a credible plan to support an economy that contracted the most in nine decades last year, while also curbing growth in government debtThe market also wants clarity on plans for debt-ridden state-owned companies such as Eskom Holdings SOC Ltd. Nedbank Group Ltd. is leading discussions to restructure the South African power utility’s debt load, according to people familiar with the talksThe rand had its worst weekly performance since early January in the five days through FridayData and EventsSudan’s central bank said Sunday it was implementing a unified exchange rate system, part of broader measures aimed at reviving its struggling economySouth Korea’s 20-day export numbers for February are due on Monday. The steep rise in 10-day exports may have been a bunching in sales occurring before Lunar New Year and working day effects, so anyone expecting a similarly big jump is likely to be disappointedThe nation’s export numbers often contain early clues on global production. For instance, a Bloomberg study covering 2015-19, shows a 23% correlation between misses versus consensus for these figures and misses from the subsequently available U.S. ISM dataThe won was flat last week, despite the rise in the U.S. dollar, perhaps insulated by past poor performance against its behavioral driversRead more: BEER and Beta Blockers, Steadying One’s Aim in EMFX: Macro ViewThailand’s trade numbers are due on Tuesday. The balance should be just above zero, with a steep decline in imports responsible for keeping the numbers in the blackJanuary’s current-account figures may show a third straight deficit in data to be released on ThursdayThai baht depreciated 0.4% last week, a little more than the global averageTaiwan’s January export orders might show another sizable increase on Wednesday, with consensus about 46% year-over-yearJanuary industrial production is likely to tell a similar story of rapid recovery on Thursday — with consensus at about 19% year-over-yearAnother vast current-account number for the fourth quarter will be released on FridayTaiwan’s dollar was one of the top gainers in Asia last weekIndia’s fourth-quarter GDP due Friday is likely to show the first year-over-year expansion since the first three months of 2020The Indian rupee was one of the strongest performers in Asia last week as inflows poured into local equity marketsChina’s official February PMIs –- for both manufacturing and services are due on Feb. 28The Chinese yuan was the third-weakest currency in Asia last week, although the stronger-than-expected fixing in yuan terms on Friday offered a glimmer of hope for bullsRead more: Yuan Fixing Miss May Herald Future Dollar DeclineA reading of Peru’s fourth-quarter gross domestic product, scheduled on Monday, may show a recovery from the lows seen amid the emergence of Covid-19 while lingering below levels from before the pandemic, Bloomberg Economics estimates.Chile’s January copper production on Friday will be watched as the metal trades near decade highs, fueling a rally in the pesoA gauge of Argentina’s economic activity index may flag a slowdown in December after seven straight monthly gains, according to Bloomberg EconomicsFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.