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<\/a><\/p>\nIn Mexico, for instance, the swap-market pricing suggests a hiking cycle could start as soon as August, even though the majority of economists say the central bank will refrain from tightening until at least February.<\/p>\n
It\u2019s a similar story in South Africa, where forward-rate agreements are pricing in a 70% probability of a 50-basis-point jump in six months, whereas Bloomberg\u2019s monthly survey shows the rate staying unchanged until year-end.<\/p>\n
Meantime, South Korea\u2019s forward-rate agreements are pricing in close to a 25 basis-point rate increase in the next six months. In contrast, most economists predict no change.<\/p>\n
Against this backdrop, AllianceBernstein\u2019s Khan said her fund favors the local debt of South Africa, Mexico and Russia, \u201cwhere markets have priced in too much in terms of the policy rate path.\u201d<\/p>\n
US central bank officials may be able to begin discussing the appropriate timing of scaling back their bond-buying program at upcoming policy meetings, Fed Vice Chair Richard Clarida said last week.
\nInflation Overshoot<\/p>\n
At the same time, the coronavirus continues to spread in large swathes of the developing world, adding to the need for more stimulus.<\/p>\n
In India, traders unwound their rate-hike wagers last month as policy makers turned to a bond-buying program to support the economy against another wave of infections. The Reserve Bank of India is likely to keep its benchmark interest rate unchanged on Friday and announce further debt purchases as the economy struggles with localized lockdowns implemented by most states.<\/p>\n
JPMorgan Asset sees more gains for EM bonds as dollar weakens<\/strong><\/p>\n HSBC Holdings Plc says the prospect that central bank support gets scaled back later than current market pricing implies suggest there\u2019s value in the front-end of the rates curve, including in South Korea and Poland.<\/p>\n It\u2019s a view echoed by Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management in London.<\/p>\n \u201cWe are long South Africa and Mexico as we do think that the curve prices in a rate hiking trajectory that is not likely,\u201d he said.<\/p>\n Market correction<\/strong><\/p>\n That\u2019s not to say caution isn\u2019t warranted. The Citi EM Inflation Surprise Index is at the highest since 2008, a reminder of how many investors were caught off guard by the resurgence of inflation.<\/p>\n \u201cRisks are likely skewed toward faster tightening, rather than slower,\u201d said Duncan Tan, a strategist at DBS Bank Ltd in Singapore.<\/p>\n Inflation data from South Korea to Turkey and Poland this week may offer clues on the path for monetary policy. In Mexico, traders will monitor the central bank\u2019s quarterly inflation report on Wednesday for signs that the monetary authority could adopt a less dovish outlook.<\/p>\n \u201cUnless near-term data releases provide a confirmation to what is being priced, the current market pricing is vulnerable to a correction,\u201d said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.<\/p>\n \u201cThe market is already pricing in more hikes than what fundamentals are suggesting,\u201d she said.<\/p>\n
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