The recent rally in emerging-market assets has stalled as a surge in long-term US Treasury yields and renewed tensions in the Middle East dampened investor appetite for risk. This interruption ended a four-day winning streak for emerging market stocks and led to higher borrowing costs in these economies.
Developing economies are particularly vulnerable to shifts in US monetary policy expectations and geopolitical instability. Higher Treasury yields make holding emerging market debt less attractive, while conflict in the Middle East drives demand for the US dollar as a safe-haven asset.
Investors had previously anticipated a Federal Reserve pivot towards looser monetary policy. However, robust US economic data has pushed back the timeline for potential rate cuts, causing the 10-year Treasury yield to climb above 4.5%. Concurrently, escalating conflict in the Middle East has prompted a flight to safety among investors.
