 EM high yielders were rocked by the jump in US yields; there may be more volatility but don’t expect a ‘taper tantrum’ rerun  Mexico, South Africa, Brazil and Indonesia appear most vulnerable, according to our new macro score card  We stick with our preference for EM external debt over local Like usual, EM debt is starting to be shaken by moves in US Treasury yields With all eyes on surging US yields, we look at what this means for EM debt. Already rates in EM high yielders have shot higher and while we don’t rule out further instability we don’t expect to see a full blown rerun of the 2013 ‘taper tantrum’. Still, previous episodes of sharp increases in US rates show a disproportionate impact on EM bond yields. A major factor to watch is EM capital outflows which were big in 2013 and exacerbated the situation. This time round, foreign funds left in droves last year in response to the pandemic which softens the extent of further capitulation this year. The market impact could still be significant given policy extremes and distorted term premiums in several EMs. Plus, low volatility regimes typically mask underlying macro fragilities which are only revealed and rapidly priced in during market stress.

Mexico, South Africa, Brazil and Indonesia look most vulnerable We screen for the more vulnerable EM countries versus the more resilient in the event market volatility intensifies. Compared with similar exercises in the past, we use different metrics to account for policy extremes and structural shifts, to deemphasize cyclical improvements which tend to be temporary. Among the high yielders, local rates in Mexico, South Africa, Brazil and Indonesia appear most vulnerable. Interestingly Poland – a low yielding market – is also found to be more exposed. By contrast, China, Korea and Thailand look most resilient.

Our new risk barometer shows we’re not in distress territory We also constructed a barometer of global risk factors that matter most for EM rates.

The good news is it suggests that financial conditions are still not in distress territory despite the recent rise in US rates. But historically, any sharp deviation in this measure has led to magnified moves in EM rates.

Prefer EM external debt over local debt Finally, we detail why we expect EM external debt to outperform EM local debt. It’s mostly because external EM debt is supported by bigger buffers than in 2013, while rising commodity prices may result in higher inflation risk premiums priced into EM local debt.