US Tapering and Latin American Bonds

by | Sep 24, 2021 | 55th Annual FELABAN Assembly, Fiba Blog

The Federal Reserve Chairman, Jerome Powell, said on Wednesday that tapering “may soon be warranted” and might consider moving up its timetable for raising interest rates to 2022, reflecting a strong conviction the US economy is on the path to full recovery.

What could this mean for Latin American bonds?

According to Robert Wood, Principal Economist Manager, Country Risk Service Latin America and the Caribbean at the Economist Intelligence Unit, “assuming US monetary normalization doesn’t affect bond markets too negatively (notwithstanding the potential for sporadic volatility) and there are no international financial market shocks, the outlook for Latam bonds should still be fairly favorable.”

In his opinion, financing conditions will tighten slightly because of the tapering, which also has the potential to cause outflows from emerging markets, but he believes the terms for most sovereign issuers should be quite manageable. Plus, considering that external bond financing needs from governments will be moderate and that investors will be on the lookout for higher yields, he anticipates a supportive demand for Latam issuances.

“I expect to see the usual flurry of bond issuance in January from Latams and other EMs,” he said.

The specialist believes that governments showing greater progress on fiscal consolidation are likely to have greater success in terms of securing better terms from the markets.

A key difference he identifies between now and the 2013 taper tantrum is that then, a lack of communication caught the markets off guard. This time, it won’t be a market surprise, and while he expects some volatility in the short run, “under a baseline scenario, most countries in the region should be able to absorb the transition to somewhat tighter monetary conditions reasonably well.”

Moreover, because of the resurgence in inflation in Latam, several central banks have already begun to normalize interest rates, positioning them ahead of the curve, and, according to him helping them to dampen the impact of tapering in terms of relative interest rate differentials.

“Currencies are mostly floating in the region, so they will help to absorb the adjustments or more adverse external conditions should they arise,” he said.

Key issues like this, and other impacting Latin America, including the political landscape and the financial digital revolution going on in the region, will be covered by Robert and his fellow panelists, Michael S. Hanson, Executive Director, and Senior Global Economist at J.P. Morgan and Marcos Urarte, CEO of Pharos, during their discussion at the 55th FELABAN Assembly. The hybrid experience will take place both online and in presence at Hollywood, Florida’s Diplomat Beach Resort, between October 30th and November 2nd.