How Vulnerable Is Emerging Market Debt to Fed Tapering in 2022?

Swift and prudent monetary policy action in emerging markets that preceded the most recent taper announcement bodes well for emerging market debt markets.


    The announced start of Fed asset purchase tapering has left some market participants concerned that emerging markets (EM) are vulnerable to a repeat of the 2013 “taper tantrum”. In this paper, we argue that emerging market debt (EMD) as an asset class is in a stronger position to weather the tightening of US monetary policy in 2022. We observe several fundamental and technical differences compared to 2013 that contribute to this relative resilience. They include improved balance of payments dynamics in EMs and a reduced reliance on external sources of finance; less vulnerable technical positioning within EM bond markets, including via lower share of foreigner participation; and a relative reduction in EM corporate leverage. We acknowledge that the relative global growth environment is not necessarily as favorable for EMs as it was back in 2013–2014, though we observe that EM central banks have learned valuable lessons following the experience of the taper tantrum. In our assessment, swift and prudent monetary policy action in EMs that preceded the most recent taper announcement bodes well for EMD markets. Given these factors, we do not expect Fed tapering to be a catalyst for a meaningful episode of EMD selloff. The balance of risks favors hard-currency (HC) bonds over local-currency (LC) bonds, in our view.


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    • Senior Vice President, Portfolio ManagerFranklin Templeton Fixed Income
    • Senior Vice President, Portfolio Manager, Research AnalystFranklin Templeton Fixed Income
    • Vice President, Portfolio Manager, Research AnalystFranklin Templeton Fixed Income
    • Vice President, Portfolio Manager, Research AnalystFranklin Templeton Fixed Income
    • Vice President, Research AnalystFranklin Templeton Fixed Income