In bond markets, the spillover effects of UMP have manifested themselves in very rich prices, excessive spread compression in some cases, overdone risk taking by some investors as they search for yield in “new frontiers” or in “covenant lite” and high yield EME corporate bonds.
The unwinding of these investments could be a source of significant turbulence, as we saw recently in last May and June when the Fed’s “tapering talk” started. All these inflows have also generated important nominal and real exchange rate appreciations that are not in line with fundamentals, and they have had real effects in EMEs, slowing down exports and economic growth.