Higher Treasury Yields Need Not Wound Emerging Markets

Changes in U.S. interest rates can affect financial conditions in emerging markets, but the linkage isn’t as tight as some believe, according to a research paper from the Federal Reserve released Wednesday. While higher Treasury yields can significantly boost borrowing costs for some nations, “such effects importantly depend on the drivers of higher yields and domestic conditions” in a given emerging market nation, Jasper Hoek, Emre Yoldas and Steve Kamin wrote. “Our results help explain limited financial spillovers to [emerging market economies] from higher U.S. Treasury yields so far this year, as the increases appear to have been substantially driven by improved growth prospects for the United States,” they added, noting that is a net positive for the prospects of less developed economies. “That said, were future increases in interest rates to reflect heightened concerns about inflation, vulnerable [emerging market countries] would likely come under pressure,” they wrote.

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