Reflation trade poses a risk to emerging markets

The reflation trade driving government bond yields higher poses a risk to emerging markets, according to Bloomberg. 

Key points

Bonds from Indonesia, Mexico, and Malaysia are the most vulnerable to sudden surges [in bond yields], because they historically have fiscal and/or current-account deficits, or both.

Sovereign securities from South Korea, the Czech Republic, Poland, and Thailand – all of which have open capital accounts and a relatively high dependence on trade – were found to be the most sensitive to a gradual move higher in US rates.

The US 10-year yield rose to a 10-month high of 1.20% on Monday, tracking the recent rise in the long-term inflation expectations. The 10-year breakeven rate, the bond markets' gauge of long-term inflation expectations, rose to an eight-year high of 2.21% on Friday. 

However, the dollar is struggling to benefit from the uptick in bond yields. The dollar index, which tracks the greenback's value against majors, fell to 90.85 early Tuesday, having faced rejection above 91.60 on Friday.