US real yields turning positive to raise pressure on EMs: The inflation-adjusted 10-year yield on US treasuries turned briefly positive last week, sounding alarm bells among emerging-market money managers, Bloomberg reports. US-based Franklin Templeton said it would cut its positions in high-yield debt, while Fidelity International is betting against EM currencies, as the threat of positive US real rates begins to boost the USD and triggers outflows from riskier EMs. Many emerging economies are already dealing with inflationary and budgetary pressures caused by rising food and energy prices on the back of the Russia-Ukraine war.

But is it an indicator of headwinds peaking? A small number of strategists believe that positive real rates could cause the Fed to dial back the hawkishness in a good move for EMs. “I definitely think U.S. real yields crossing the zero-line is an important milestone on the path towards a peak in the monetary headwinds emerging-market investors are facing in 2022,” said one strategist at Nordea Investment. “Positive real rates would also bring us closer to peak Fed hawkishness, which is the ultimate requirement for risk appetite to stage a meaningful comeback.”

Surging inflation has pushed many EM policy rates into negative territory: Some 35 of the 42 nations tracked by Bloomberg currently have negative real policy rates. This includes Egypt, where a 10.5% inflation rate in March pushed Egypt’s real rate into negative territory despite the 100-bps rate hike last month.

The good news? The Fed (probably) won’t sanction an even faster tightening cycle next month. Fed officials are yet to give public backing to Federal Reserve Bank of St. Louis President James Bullard’s suggestion that a huge 75-bps hike might be needed to tame inflation when the central bank meets at the beginning of May. Federal Reserve Bank of Cleveland President Loretta Mester has come out against the proposal, while Fed Chair Jerome Powell hasn’t commented on the matter.

When the dust starts to settle, Latin America could be the top choice for bond buyers: The fact that some Latin American central banks started monetary tightening long before Russia’s invasion of Ukraine, as well as appreciating regional currencies, suggests that these countries might be the first to hit peak interest rates this cycle. That creates chances in short-term sovereign bonds as yield curves steepen, Bloomberg reports. Traders have their eye on Brazilian, Chilean, and Colombian debt in particular.

But predicting inflation is a loser’s game: Rate hikes won’t peak globally until inflation is brought under control — and as the aftermath of Russia’s invasion of Ukraine has demonstrated, it’s very difficult to predict the impact of global events on prices. “The margin of error is way too high to call for peak inflation,” one EM debt-watcher told Bloomberg.

Here in Egypt we could still be in store for another rate hike in addition to the surprise 100 bps increase the Central Bank of Egypt (CBE) announced last month. Analysts say the CBE will be watching the Fed’s May meeting and market developments closely for cues. Ratings agency Fitch sees Egypt making a further 300 bps in rate rises by FY 2023-2024.