The prospect of an extended period of loose monetary policy facilitated by low inflation should provide ongoing support to many emerging market (EM) local currency government bonds. However, we expect policy rates to be slightly higher by the end of 2014 on average, albeit not as high as the market generally expects. This may put upward pressure on long-term risk-free yields. Meanwhile, a temporary increase in risk aversion could also prompt a spike in credit spreads.
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