Economy_How emerging market bond affected by the increasing U.S. interest rates

The emerging market bonds had their biggest two-week decline since July 2002 on concern acceleration inflation will boost the pace of global interest-rate increases, reducing demand for riskier assets, reported Bloomberg.

The bonds of emerging market nations are designed to attract the investors with interests in the developing countries in Europe, Middle East, Africa and Asia. It is often riskier than the bonds in U.S. but more profitable if getting the right bets.

Bloomberg reported that Morgan Stanley Capital International Inc.'s Emerging Market Index of Stocks, an equity benchmark made up of 733 members, fell for nine consecutive days until yesterday, its longest streak of losses since September 2001. The index, which tracks the stocks of companies in Eastern Europe, the Middle East, Asia and Latin America, today rose 0.4 percent, paring its decline in the last two weeks to 6.3 percent.

The decline followed after the U.S. Federal Reserve lifted its target rate for overnight between banks by a quarter point to 2.75 percent on March 22 and said that the U.S. inflation pressures were picking up, spurring speculation it may abandon its nine-month-old policy of gradual increases. A U.S. government report on March 23 showed consumer prices rose 0.4 percent in February, the most in four months.

Part of the money has flowed out of the Emerging-market equity funds. For example, the funds for Europe, the Middle East and Africa had their biggest weekly outflow of money in at least three months, according to EmergingPortfolio.com, a Boston-based fund tracker.

As a consequence, the governments in those nations will be pressed to raise their interest rates to attact the investors, with the stockmarkets dropped.

Surely, the investment banks, who are good at making betting products for the investors, has lost profit in the outflow money from emerging market bonds, and more from the clear measure the Fed has taken.