Emerging-market bond bulls are betting the imminent end of central bank interest-rate hikes will help power up the asset class. El Nino may have something to say about that.
The periodic weather pattern that is currently forming in the Pacific Ocean typically results in hotter, drier conditions and therefore higher food prices in affected nations, giving policymakers more reason to keep pushing up borrowing costs. Among the developing-nation bond markets most at risk are India, the Philippines and Peru.
Investors aren’t yet discussing El Nino’s effects in depth, "which makes me nervous that we may be complacent to this risk,” said Eimear Daly, an emerging-market strategist at NatWest in London. "Markets are fixated on carry right now and not focused on what seems like increased stagflation risk.”