Such a selloff could be triggered by higher developed-world yields as central banks wind down easy monetary policy, like in 2013’s Taper Tantrum. That would dim the appeal for carry traders of borrowing dollars to buy assets in higher-yielding developing world currencies.
Average yields tracked by the Bloomberg Emerging Market Local Sovereign Index have dropped 17 basis points since reaching a two-year high in May.
“If there’s carry in Treasuries then investors might start to rethink their actions in emerging-market debt,” said Olu-Pitan at Schroder. “If we return to the 2013 level we need to be more cautious because of the ETF. The immense flow into these passive strategies is something we need to be wary of.”
This article was provided by Bloomberg News.