The announced start of the Federal Reserve’s (Fed’s) asset purchase tapering has left some market participants concerned that emerging markets (EM) are vulnerable to a repeat of the 2013 “taper tantrum.” 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.
Taper Tantrum: 2013 Vs. 2022
Following a year of speculation, the Fed opened the door in September to start tapering its asset purchase program as early as mid-November 2021. This announcement, which was confirmed at the latest Federal Open Market Committee (FOMC) meeting on November 3, responds to the Fed’s concerns over inflation pressures and the observed strengthening of the labor market. More precisely, the Fed views inflation as transitory but admitted that it was lasting longer and had a more uncertain future path than expected. In addition, the US economy has seen a marked strengthening of the labor market, with US employment having rebounded strongly following the COVID-19 pandemic. At present, the Fed’s balance sheet stands at US$8 trillion, more than double the size in December 2013 (US$3.7 trillion), when former Fed Chair Ben Bernanke similarly began a tapering of asset purchases.
Fed tapering not only reduces the amount of US monetary accommodation, but it also acts as a forewarning of tighter policy rates in the future. The combination of projected reductions in asset purchases and the possibility of higher rates in 2013 led to a period of high volatility and rising rates in global bond markets—an episode that became known as the taper tantrum. But how did the taper tantrum affect the US Treasury (UST) and EM bond markets in 2013–2014? And can we extract any valuable lessons for EM bond markets in light of the new taper that started in mid-November 2021?
To answer these questions, we examine the asset price response to the taper back in 2013 and 2014, identifying two distinct time periods: first, the period that ran from the May 22 to December 18, 2013, which we define as “Bernanke’s taper talk”; and second, the period that ran from December 19, 2013, to mid-October 2014, which we define as “Yellen’s taper.”
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