Will another taper tantrum hit emerging markets?
In early July, the yield on U.S. 10-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 U.S. 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 U.S. long-term rates rose in anticipation that the Fed might soon start tightening its monetary policy. With U.S. 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 percent to close to 1.8 percent before stabilizing and falling back to previous levels this month.