UPDATE: Emerging market investors brace for shrinking Fed balance sheet
By Anneken Tappe
Fed's balance-sheet unwind could create a headwind for emerging markets
While dollar bulls are cheering the Federal Reserve's decision to begin winding down its balance sheet, emerging market investors should buckle up for a bumpy ride.
The Fed's huge asset purchasing program, which was central to its quantitative easing strategy in the aftermath of the financial crisis, helped push down yields on developed market bonds, sending yield-hungry investors into the arms of emerging markets.
In September, the U.S. central bank announced it would begin to gradually unwind its $4.5 billion balance sheet (http://www.marketwatch.com/story/fed-to-take-historic-leap-into-the-unknown-2017-09-14) starting this month, which could change the dynamic.
And while the exact effects of the unwind remain the subject of fierce debate, "you could argue that the unwinding of the Fed could mean higher yields and a stronger dollar," said Jonathan Davies, head of currency strategy for UBS Asset Management's investment solutions team.
Read:Fed's balance-sheet unwind will be moment of truth for financial markets (http://www.marketwatch.com/story/feds-balance-sheet-unwind-will-be-moment-of-truth-for-financial-markets-2017-09-18)
"If Treasurys offer halfway decent returns again, people might well reallocate their assets [to the U.S.]," Davies continued. "On balance, the effect remains to be seen, but there is a potential negative effect on global risk assets."