The relative calm in EMD markets, the tight trading range for US bond yields and the strong decline in Eurozone bond yields have created a benign environment for the emerging market (EM) carry trade.  

## EMD hard currency spread almost back at ‘pre-taper’ levels

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## Marked improvement in sentiment towards EM

Declining or flat developed market (DM) yields in combination with higher EM yields – about 150 basis points (bps) higher relative to May last year – led to a marked improvement in investor sentiment towards EMD in the past few months. This has been reflected in positive flows for several weeks in a row and in a substantial narrowing of EMD hard currency spreads and an appreciation in EM currencies.

## EMD in hard currency is the main beneficiary

Most of the EM currency appreciation took place between March 20 and April 9. In those three weeks, EM currencies gained back what they had lost in the beginning of the year. This is a nice rebound, but nothing spectacular. EM hard currency debt was able to benefit more from the benign global environment: in February and March alone the spread tightened by 80 bps, recovering back to June 2013 levels.

The performance difference between local and hard currency EMD is clearly visible in recent fund flows. Flows to the hard currency segment recovered much more than to local currencies. As a matter of fact, EM local currency funds have not enjoyed any meaningful inflows in the past few months. The outflows stopped, that’s it. In contrast, EM hard currency funds have had five consecutive weeks of solid inflows.