EM outflows jump on rising bond yields

Emerging market outflows approached “taper tantrum” levels at the start of March, in a sharp reversal of inflows recorded in February.

Rising long-term US treasury rates have sparked a sharp rise in outflows from emerging market equity and bond funds, according to the Institute of International Finance’s (IIF) capital flows tracker.

“Back in 2013, what ended the tantrum was a shift in rhetoric from the Fed, most obviously with the dovish ‘no taper’ surprise at the September FOMC meeting,” IIF’s analysts said.

“We think a similar shift in rhetoric is needed now and will come eventually. The Fed needs to refocus markets away from the near-term GDP rebound and shift attention to the medium-term growth outlook,” they continued.

The outflows are a reversal from the £31.2 billion in inflows attracted by emerging market bond and equity funds in February, buoyed by vaccination progress and higher commodity prices.

During February, China assets supported the overall dynamic, with the IFF tracker revealing inflows of $9.3 billion to fixed income and $7.8 billion to equities.

However, equity flows have been scaling backing this year, slowing to $3 billion during January and February, compared with inflows of $43.2 billion into debt.