Emerging markets yield to pressure

Emerging market credits are once again feeling the full force of fears that QE tapering could start as soon as next month.

US Treasury yields rose to 2.85%, their highest level for over two years, as the markets feel more certain that the Federal Reserve will tighten policy in September. Talk that Larry Summers could succeed Ben Bernanke as Fed chairman may also have contributed to rising yields. Summers is perceived as more hawkish than Bernanke and Janet Yellen, the other contender for the post.

Higher US yields are rarely good news for emerging markets, and this was evident in sovereign CDS spreads. Indonesia, one of the weaker names in Asia, widened 42bps to 275bps and its spreads are now at their most elevated level since October 2011. The sovereign has been extremely volatile amid the QE tapering speculation, as well as concerns about Chinese growth, and it would be no surprise to see this continue given the uncertain outlook.

Not many Asian sovereigns trade wider than Indonesia, but India's (State Bank of India) spreads soared to 352bps today as the government battled to halt the precipitous slide in the rupee. The main opposition party called for an early election and the slowdown in growth and persistent current account deficit are concerns for international investors.

Emerging markets may be suffering disproportionately, but their western counterparts are certainly not immune from rising government bond yields. The Markit iTraxx Europe widened 3.5bps to 102.5bps, with peripheral credits underperforming.

Looking ahead, the main focus will be on the release of the latest Fed minutes on Wednesday, which could shed more light on the timescale of QE tapering. Markit PMIs later in the week will also be closely watched for signs that the world's major economies are gathering momentum.

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