Fears of a bubble forming in EM bonds now seem overdone

Although the tone of this week’s FOMC statement suggests the US central bank is unlikely to taper its asset purchases imminently, we still think dollar-denominated emerging market (EM) government bonds are vulnerable to an eventual scaling back of unconventional policy stimulus. We forecast the spread of the JP Morgan EMBI+ Index (EMBI+) over US Treasuries to rise to 325bp by year-end (from 273bp now) and to 350bp in 2014.