Bleak prospects for dollar-denominated bonds

Emerging market (EM) dollar-denominated government bonds have made a decent start to the year, regaining some lost ground on their developed market counterparts. But we doubt that this strong performance will last long. We expect President Trump to push through a substantial fiscal stimulus package in the US in the next few months, which is likely to prompt the Fed to hike rates more aggressively than is currently implied by market pricing. We think that this will push up the “risk-free” component of the yield on dollar-denominated bonds.