Concerns over a potential Federal Reserve interest rate hike this month have become the dominant force driving market sentiment, overshadowing Middle East tensions and AI-related volatility, as the global bond selloff extends to emerging markets from South Africa to South Korea and Poland, where 10-year government bond yields are all on the rise.
South Africa, widely considered a bellwether for emerging market assets, led the bond market decline among major developing economies on Tuesday. Data shows the country's 10-year government bond yield climbed 9 basis points to 8.83%, reaching its highest level since July 24. Similar-maturity bond yields in South Korea, Indonesia, and Latvia each rose by 5 basis points.
Meanwhile, JPMorgan data indicates the risk premium on emerging market dollar bonds increased 6 basis points on Monday, reaching 235 basis points. Credit default swap prices for 30 developing country sovereign issuers have now risen for four consecutive days, marking the longest streak since April.
Money market data shows investors currently price in nearly a 70% probability that the Fed will raise its benchmark rate by 25 basis points on September 16. This market pricing follows hawkish signals from Fed Chairman Kevin Warsh at last week's Jackson Hole symposium, where he indicated that U.S. inflation has not shown meaningful signs of easing and may require Fed action.
Emerging market local currency bonds have been on a steady decline since hitting an all-time high on August 25. Concerns over persistent inflation and the Fed's hawkish stance have dampened investor appetite for risk assets. The decline has persisted despite ongoing strength in AI stocks and continued investor optimism about carry trade opportunities in developing nations.
However, some asset managers suggest that global investors diversifying their portfolios away from dollar-denominated assets could soon attract fresh inflows, providing support for bond prices.
The negative sentiment has also spread to foreign exchange markets, with most emerging market currencies posting declines. The Indian rupee and New Taiwan dollar edged slightly higher, while the South Korean won, Hungarian forint, Malaysian ringgit, and Israeli shekel were among the weaker performers.
Simon Quijano-Evans, senior emerging market strategist at Macro Hive, noted in a report that emerging market FX remains in relative value mode, digesting Warsh's Friday comments. He questioned whether markets are effectively doing the central bank's work and whether they will now begin to anticipate another round of bond purchases by institutions like the Fed.
Emerging market equities, by contrast, have extended their upward momentum. The MSCI emerging market stock benchmark rose 0.3% on Tuesday, following its strongest monthly gain in August since 2004. Taiwan Semiconductor Manufacturing contributed 66% of the index's advance. Investor confidence in Taiwanese AI companies has been bolstered after Nvidia's $3.5 billion investment in MediaTek, marking Nvidia's largest direct investment outside the United States.
New bond issuance activity is set to resume in September. Saudi Arabia is marketing benchmark-sized dollar-denominated Islamic bonds with 5-year and 10-year tenors. Pakistan has also held investor conference calls to prepare for the issuance of long-dated 5-year and 10-year bonds.
Israel's central bank faces a difficult rate decision on Tuesday, with economists divided on whether policymakers will deliver a third consecutive rate cut or hold rates steady. Israeli policymakers are seeking to balance modest inflation and a strengthening shekel, supported by the current lull in direct conflict with Iran, against fiscal pressures that may build ahead of the October election.