Imagine you’re aboard a flight that’s on its final approach into the Indira Gandhi International Airport in Delhi, India. For most of the flight, the plane, a 787, has been traveling at about 903 km/hour (that’s around 560 miles/hour). As the flight attendants collect that last few plastic cups, the plane starts to slow and banks gently to line up with the runway. The man next to you, oddly distraught over the change in airspeed, yelps as the pitch of the engines audibly lowers. Panicking, he unbuckles his seatbelt, stands up and yells, “It’s slowing down!! Why is it slowing down?!? I’m bailing out!!”
While you’d never expect this sort of thing to actually happen on a real flight to India, something similar is happening with emerging market investors. Read more
With the recent increases in U.S. Treasury bond yields, some are decrying the situation as a disaster-in-the-making for Asian economies; however, we don’t subscribe to that view completely. While the levels of yields are indeed important, they’re only part of the picture; the pace at which yields change is also a critical factor. A gradual increase in the yields to 3% (the point at which we’ll cross the Rubicon, according to several commentators) wouldn’t spark a crisis for economies that have benefited from capital flows over the last few years – in effect, it would imply a further 50 basis point (bps) move higher in U.S. Treasurys from current levels, which isn’t necessarily a huge change.
The whole issue revolves around something called the “carry trade.” In its simplest form, that’s when you borrow money in a place with low interest rates, and invest that money in a place with higher interest rates in an attempt to capture the spread, or the difference between the rate levels. The worry is that with the yield differential between Treasurys and Asian government bonds diminishing, investors will abandon Asia and pile into the U.S. Read more