To give shape to these fears, analysts have been busy drawing up lists of the most vulnerable countries, based on everything from inflation to infection rates. They have been looking for this year’s successors to the “fragile five” , the countries that were hardest hit by the taper tantrum eight years ago.
Indeed, one reason why the tantrum has receded is because the virus has not. As the pandemic begins to interrupt the emerging world’s economic recovery, their central banks will surely worry less about any gathering inflationary pressure. Morgan Stanley believes that central banks in Brazil, Russia and Mexico among others are unlikely to raise interest rates as sharply as markets now expect. The delayed recovery is bad for emerging economies, but not necessarily bad for their governments’ paper.
He nonetheless acknowledges two dangers to this view. One is that American bond yields start climbing again sooner than he expects. Another risk is that the delayed recovery in a big emerging economy turns into something worse, frightening investors and raising worries about the government’s creditworthiness. In that case, the price of local bonds would fall , even in the absence of any threat of inflation. In the rich world, people flock to their governments’ bonds even in the worst of times.