Bonds to be hit hardest by inflation shock in India, Russia, Mexico

 

The fixed-income securities of the three countries appear the most vulnerable to any surge in consumer prices, according to a Bloomberg study of 10 emerging markets.

If the recent spike up in U.S. inflation numbers is a sign of things to come for global markets, that could prove especially bad news for investors in Indian, Russian and Mexican bonds.
The fixed-income securities of the three countries appear the most vulnerable to any surge in consumer prices, according to a Bloomberg study of 10 emerging markets. Their real bond yields are the lowest in the group versus their three-year average, giving them the smallest margin to spare if the nascent inflation signs prove the harbinger of a global price shock.

On the flip-side, the bonds of South Africa and Indonesia appear best positioned to weather any upsurge in inflation caused by the record central bank stimulus being rolled out to counter the coronavirus outbreak, the analysis found.

The quickening of inflation can be particularly destructive for emerging markets as it pulls down the real yield premium that compensates investors for holding riskier assets. Increasing price pressures also hinder the ability of central banks to cut interest rates, which may further complicate the process of recovery from the coronavirus pandemic.

“Should central banks be forced to have a less dovish stance and turn more neutral, this would cause a sell-off in the short and belly of the curve,” said Jean-Charles Sambor, London-based head of emerging markets fixed income at BNP Paribas Asset Management. “The rally is behind us in our opinion.”