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Opinion
April 20, 2018 www.intellinews.com I Page 23
COMMENT:
QE is dead and that is bad news for EM bonds
Pavel Grudinkin, head of emerging markets at Cbonds in Moscow
Last year was one of the most successful for in- ternational bond investors in many years, but that that is starting to change as the end of quantita- tive easing (QE) is already apparent and political risks are rising for issuers like Russia.
The systematic winding down of quantitative eas- ing programme by global regulators hasn’t been able to change investors’ positive attitude towards emerging markets (EM) assets. That was driven by a macroeconomic backdrop and the high-risk appetite on the part of investors thanks to the
low yield environment, which combined to create record breaking activity in the Eurobonds primary markets.
Despite this, since the start of 2018 the game has begun to change. The growth of the yields in the US and a revaluation of credit risk premiums has offset the ongoing economic growth in emerging markets. Volatility is on the rise again, but activ- ity in the primary market has remained at a high level. All taken together that means the windows of opportunity for issuers are starting to narrow.
The end of QE
Excessive liquidity has been driving the growth of EM markets in the last few years. Investors from developed markets in search of yield willingly took on extra credit risks. In spite of the inten- tions to withdraw, regulators were in no hurry
to hike rates and bring quantitative easing to an end. At the European Central Bank (ECB), Bank of England and Bank of Japan interest rates remained at their historical low and large as- set purchase programmes continue. Only the US
Federal Reserve has been gradually changing its monetary policy. The US regulator increased the federal funds rate three times in 2017, and from October it also started a programme to wind down its position in the bond market, reducing its securities portfolio.
However, the Fed’s actions have not impacted the markets yet because of the slow place of the change. Market participants were not interested in the tightening of monetary policy as such, but in how quickly it would be implemented.
The recent US tax reform launched by the Trump administration doubled the country’s budget defi- cit in 2018, which led the US Treasury Department to entered the market with a record borrowing plan. And the increase in the offer of treasury se- curities at weekly auctions has led to a significant withdrawal of dollar liquidity from the market.
Since the start of this year the Fed has continued to tighten monetary policy. The federal funds rate was raised in March and may be raised two or three more times during the year leading to rapid growth in US treasury securities yields. The yields on the ten-year Treasury bills (UST 10Y) has risen to a ten year high of almost 3%.
Rising borrowing costs and falling liquidity are reflected in the rates being charged on the inter- bank market: the three month Libor USD rate has grown by 62bp since the beginning of the year and reached 2.32% in April. These facts indicate that the QE era for the dollar seems is coming
to an end.