Introduction

The sell-off in emerging markets this month has affected stocks and currencies, and now bonds, as traders rush to abandon bets they have built on expectations of a rate cut.

Impact on Bond Market

The average cost of a default hedge rose across 20 emerging economies on Thursday, reaching its biggest monthly increase since June 2022. Asia led the sell-off in dollar debt and currency markets as China’s economic, financial and property crises weighed on the continent’s growth outlook. Meanwhile, local currency bond yields rose, with the largest volumes in Hungary, Romania, and Pakistan.

Traders React to Federal Reserve Meeting Minutes

This comes after traders received two messages from the minutes of the Federal Reserve meeting released late Wednesday night: first, most U.S. policymakers would rather stay on the path of raising interest rates, and second, quantitative tightening in the world’s largest economy will continue regardless of the outcome Interest rate trend. It was the final straw to end a bet that was already somewhat waning to go long bonds at the start of a new monetary easing cycle.

Expert Analysis

For his part, Richard Segal, fixed income analyst at Ambrosia Capital, said: “Inflation has eased but is still well above central bank targets and GDP growth in important countries will be above zero.”

Credit Default Swaps and Bond Yields

Credit default swaps covering developing countries rose to 216 basis points today, bringing a rise of 25 basis points this month. Pakistan’s bond yields jumped as a shortage of dollars forced factories to shut down production. Tunisia also rose after data this week showed the economy was slipping into a quarterly decline.

Carry Trade Opportunity and Currency Performance

While bets on lower interest rates on distressed bonds eased, the resumption of carry trade opportunity provided protection for currencies facing a bullish dollar. The Russian rouble, the world’s most volatile currency, performed best among its major counterparts, despite the report saying that the Bank of Russia would not opt ​​for capital controls.

Egypt’s Bond Market Outlook

As for Egypt, 5-year CDS defaulted swap contracts rose more than 5.6% on Thursday, in addition to a 4% increase yesterday, Wednesday, and reached 1517 points, the highest level in 5 weeks. Notably, insurance contracts against the risk of default on Egyptian debt have risen by more than 75% since the beginning of the year.