Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Early days to call the all-clear but it looks like Janet Yellen's gone and done it. QE is coming to an end with barely a quibble from the markets. Tantrum begone.

The calming influence of the Federal Reserve Chair has lulled markets into a soporific state of non-volatility, something her predecessor, Ben Bernanke, would have given his eye teeth for.

His May 22, 2013 congressional testimony that sparked off the infamous taper tantrum produced an 11 basis point jump in the 10-year U.S. Treasury yield in one day. This time around, the 10-year is up a mere 3 basis points. To be fair, yields had been edging higher since the start of the month as investors prepared themselves for the end of central bank bond purchases. But the volatility this time around is nothing like what Bernanke provoked -- by the end of 2013, the 10-year yield was up a full percent.

This all matters for emerging markets, which use Treasuries as a benchmark for pricing dollar-denominated bonds. The taper tantrum was a really tough ride for them, as they had an extra hit -- spreads widened on average over 125 basis points over the course of the year. For the more unstable countries it was even worse.

Diff'rent Strokes
Emerging markets are in a much stronger place than 2013, and have bond returns to match
Source: Bloomberg

For instance, the shock in 2013 reverberated in Brazil for years. This time, trading in its securities has been a picture of calm, even as investors prepared themselves in recent weeks for Yellen to make good on their expectations.

Brazilian Chill
Bonds of one of the most liquid emerging-market sovereigns looks far steadier in the face of Fed tapering than in 2013
Source: Bloomberg

This attitude has buoyed the new issue market, even for problem nations. Russia has been struggling recently with a domestic banking crisis but was still able to raise $4 billion in 10 and 30-year debt on Wednesday -- with particularly strong demand for the 30-year at 5.25 percent. Yields on its dollar debt have ticked up, but there's no sign of a systemic rout, as those for its rouble-denominated securities are near the lows for the year.

As Gadfly has pointed out, it's been a banner year for trickier emerging issuers. Tajikistan, Iraq and South Africa all found substantial demand for new debt. Companies have done well, too.

Signs of Strength
It's been a good year for the most-liquid emerging market corporate debt
Source: Credit Suisse, Bloomberg

For further evidence emerging markets are in a different world, consider the market reaction to China's credit-rating downgrade on Thursday. Though S&P Global Ratings cut the country's sovereign grade for the first time since 1999, lowering it to A+ from AA-, yields on China's 7.5 percent dollar bond due in 2027 actually fell.

The secret to all of this newfound happiness is the dollar's downturn. So long as the greenback avoids a big spike up, emerging market issuers and investors can rest a little easier. 

King Dollar
A strengthening dollar would pose greater problems for emerging markets
Source: Bloomberg

With a $100 billion inflow into emerging markets this year, 2017 is shaping up to be the year 2013 could never be. And we probably have the Fed to thank for that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net