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Investors Sour on Emerging Markets as U.S. Prospects Brighten

Pressure is building in some emerging markets as brightening U.S. growth prospects prompt investors to pull capital out of economies that look less robust.

The yield on Brazil’s 10-year local currency bond jumped to 9.65% on Wednesday, from 6.96% at the end of 2020. That is the highest since the peak of the market tumult in March 2020, according to FactSet. Russian and Mexican bond yields also recently hit their highest levels in a year. When bond prices fall, yields rise.

February and March saw the biggest net outflows from emerging-market bonds since the pandemic emerged last spring, with investors withdrawing about $3 billion in each month, according to data from the Institute of International Finance. The selloff was heaviest for debt issued by South Africa, Indonesia and India. Fund managers also pulled out a combined $670 million from stocks in developing countries over those two months.

Investors say emerging markets have been upended by the improved U.S. growth outlook, which is strengthening the dollar and sending Treasury yields higher as money managers bet the Federal Reserve will raise interest rates in coming years to keep inflation tame.

The optimism about the U.S. is drawing capital out of emerging markets and forcing some developing countries to raise interest rates despite economic weakness.

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