Concerns over President-elect Donald Trump’s trade policies and surging U.S. Treasury yields are weighing heavily on emerging markets. Investors are scaling back expectations for interest rate cuts in developing economies, while fears of a tariff-driven trade war are dampening sentiment toward local currency bonds.
According to Bloomberg data, the one-year swap index for 18 emerging economies has climbed more than 16 basis points this quarter, marking its steepest quarterly rise in over a year. Meanwhile, the Bloomberg Emerging Markets (EM) local debt index has dropped 3.5% since early October, cutting year-to-date gains to below 2%.
Dollar Strength and Treasury Yields Spark Policy Shifts
Trump’s “America First” agenda, driving the dollar higher and pushing up Treasury yields, creates a challenging environment for emerging market bonds. The yield on 10-year U.S. Treasuries has risen from 3.60% in mid-September to 4.50%, with some analysts forecasting it could exceed 5% in the coming months.
This rapid appreciation of the dollar has prompted speculation that central banks in emerging markets may delay anticipated rate cuts to stabilize their currencies. Barclays, for instance, has revised its earlier prediction of rate cuts in Indonesia for November and December, citing the dollar’s strength. Economists at Barclays also warned that South Korea and Taiwan could face challenges in implementing further rate reductions.
In Brazil, inflation concerns led policymakers to accelerate their tightening cycle, delivering a 50 basis point rate hike on November 6.
Uncertainty Around Trump’s Tariffs Fuels Volatility
The possibility of sweeping tariff hikes under the Trump administration adds another layer of risk. Trump has floated tariffs as high as 60% on Chinese imports and blanket rates of 10–20% on goods from other countries. While specifics remain vague, such measures could disproportionately hurt Asian economies, excluding China, due to their heavy reliance on U.S. trade.
Tan Min Lan, Head of Asia Pacific Investment at UBS Global Wealth Management, noted that despite relatively low inflation in Asia, protectionist policies from Washington could expose regional currencies to depreciation risks. Tan added that returns on Asian local currency bonds might remain flat or even turn negative in the coming year.
Emerging Market Bonds Face Diminished Appeal
Their narrowing yield premiums compound the deteriorating outlook for emerging market bonds. According to Bloomberg indices, the average yield spread on sovereign bonds in these markets is currently about 10 basis points lower than its historical average of 230 basis points over the past decade.
Strategists at Société Générale warned that if U.S. yields continue to climb, capital inflows into emerging market debt could come under further pressure. Trump’s policies and a stronger dollar present significant hurdles for investors in these markets, casting uncertainty over an already challenging landscape.
Most Commented