What’s good for U.S.-China-Japan hurts emerging markets

Significant Progress

“We are seeing significant progress in the global economy now, so people shouldn’t be worrying,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The gradual return to a more balanced pattern of global growth should be good rather than bad for almost everyone in the medium term.”

The biggest source of market turmoil was the June 19 announcement by Chairman Ben S. Bernanke of a possible time frame for the Fed to begin paring its $85 billion in monthly asset purchases, starting as soon as later this year.

Since Bernanke first raised the possibility of 2013 tapering in May 22 congressional testimony, the yield on 10-year Treasury notes has risen to 2.62% at 10:30 a.m. in New York today from 2.04%, according to Bloomberg Bond Trader prices. Treasuries lost the most since 2009 in the first half of the year and posted their longest run of quarterly declines since 1999.

Jim Paulsen, chief investment strategist at Wells Capital Management, calls the gains in long-term borrowing costs a “good yield rise” because they reflect mounting confidence at the Fed and among investors in the U.S. economy. He finds that since 1967, whenever the 10-year bond yield has been below 6%, any increase typically has been associated with improving sentiment.

Rising Payrolls

U.S. payrolls rose by 195,000 workers in June, beating analysts’ forecasts, and revisions added 70,000 jobs to the employment counts for April and May, according to Labor Department data released July 5. The jobless rate remained at 7.6%, near a four-year low.

If the faith continues to solidify, “higher interest rates should not materially impact economic activity, and the stock market may continue to provide favorable results,” said Paulsen, who helps manage more than $340 billion in Minneapolis. The Standard & Poor’s 500 Index has risen 15% this year.

Tapering “is actually healthy,” given that an expansion in the Fed’s balance sheet beyond $3 trillion has failed to spur much growth in credit or the economy, according to a June 27 report by BlackRock Inc., the world’s largest asset manager. Gross domestic product grew at a 1.8% annualized rate in the first quarter, revised from a previous estimate of 2.4%, according to Commerce Department data.

Tighter Credit

There is less room for celebration elsewhere as investors push yields up even in economies less able than the U.S. to cope with tighter credit. The decoupling is reflected in the 0.6% decline since May 22 in the S&P 500 Index compared with a 3.7% fall in the MSCI World Index.

Countries that may suffer from unwanted yield increases include the U.K., Russia and those in the euro area’s crisis-hit periphery, said Stephen King, chief global economist at HSBC Holdings Plc in London.

The yield on Spain’s 10-year note has risen to 4.71% from 4.18% on May 22, even with the economy contracting for seven straight quarters. Portugal’s yield last week jumped above 8% for the first time since November as the government struggled to address crisis-fighting austerity fatigue. Ten-year U.K. government bond yields climbed to 2.59% on June 24, the highest since 2011.

Such gains will make it costlier for governments to finance their debt and for consumers and companies to access credit, extending the countries’ woes.

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