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Will Another Taper Tantrum Hit Emerging Markets?

Market movements this month have led to renewed fears that changes in US financial and monetary conditions will trigger a painful wave of capital flight from emerging markets, as happened in 2013. But times have changed, and the greatest risks to emerging markets now lie elsewhere.

SÃO PAULO – In early July, the yield on US ten-year Treasury bonds fell to its lowest level in four months, and stock markets dipped on fears that this year’s rosy projections for economic growth will not be borne out. Still, the prevailing view is that the recent spike in inflation will be transitory, allowing the US Federal Reserve to pursue a smooth unwinding of its balance sheet at some point in the future.

This month’s market episode can be partly traced back to February and March of this year, when US long-term rates rose in anticipation that the Fed might soon start tightening its monetary policy. With US President Joe Biden’s large fiscal packages came new fears about inflation and economic overheating. Ten-year Treasury yields duly rose from below 1.2% to close to 1.8% before stabilizing and falling back to previous levels this month.

Though there were some jitters following the June meeting of the policy-setting Federal Open Market Committee, when some FOMC members assumed a more hawkish attitude, the Fed nonetheless managed to keep markets cool by promising to give plenty of advance notice before beginning to taper its monthly bond purchases. Since then, interest rates have declined at a notable pace.

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