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As Treasury yields rise, don’t discount the returns in emerging markets

17 6 2

At the start of 2016, the yield on 3-month US Treasury bills was barely above zero per cent, having been driven down by the aggressive quantitative easing programme of the Federal Reserve.

This week, the 3-month Treasury yield was approaching the 2 per cent mark for the first time since the global financial crisis. In a sign of the extent to which the financial landscape has changed since the end of last year, risk-free cash-like instruments such as short-dated US government debt are starting to offer investors a decent return.

The 3-month Treasury yield – which currently stands at almost the same level at which its benchmark 10-year equivalent stood last September – now offers investors the same return as the dividend yield of the S&P 500 equity index.

Make no mistake, cash is no longer trash. This ought to give international investors pause for thought.

Rising oil prices and US interest rates are a volatile mix for emerging markets

It has been the meagre post-crisis returns offered by cash and safer government bonds that have been underpinning demand for higher-yielding investments such as alternative assets, emerging markets and sub-investment grade, or “junk”, bonds. Over the past several years, large institutional investors, including pension funds and insurance firms, have been forced to venture into riskier parts of the financial markets which they would otherwise have never allocated money to.

The meagre post-crisis returns offered........

© South China Morning Post