Emerging-Market Bond Rally Threatened as Hawkish Flags Multiply

-- The balmy days of dovish monetary policy that fueled a rally in emerging-market bonds looks to be over as central banks across the developing world turn more hawkish.Returns from emerging-market local-currency debt are trailing their dollar-denominated peers by the most in two years as resurgent inflation has damped the prospect of further interest-rate cuts in Latin America and Eastern Europe.

Amid the recent hawkish developments, Brazil’s inflation topped forecasts in May, while Mexico’s central bank said last month sticky prices pressures are a reason to be cautious about further easing. Meanwhile, Peru’s policymakers unexpectedly halted rate cuts last week amid concern about consumer prices.In Europe, Hungary’s central bank said it’s near the end of its easing cycle, while the Polish government’s wage plan may delay rate cuts.

The growing hawkish signs are already helping to trigger investor selling. The $2.7 billion VanEck JP Morgan EM Local Currency Bond ETF, the world’s largest ETF tracking developing-nation debt, has seen net outflows over the past three months, according to data compiled by Bloomberg.

“We currently have between 12% and 15% in local frontier markets with a risk limit of 1% in each market, so do have a good diversification there,” said Daniel Wood, a fund manager at William Blair in London, adding he favors countries including Kenya, Nigeria and Pakistan. “You’re in the sweet spot now where you’re enjoying high carry with strong multilateral support.”Others, such as T. Rowe Price, say investors may have to wait a while until emerging-market local bonds resume their rally.

-Minneapolis Federal Reserve President Neel Kashkari on Sunday said it's a "reasonable prediction" that the U.S. central bank will cut interest rates once this year, waiting until December to do it. "We need to see more evidence to convince us that inflation is well on our way back down to 2%," Kashkari said in an interview with CBS' "Face the Nation" program. The Fed last week held its benchmark policy rate in the 5.25%-5.

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