The reaction of Peruvian financial markets after the tapering announcement

One consequence of the expansionary monetary policies implemented by developed countries, especially the U.S., was the massive influx of foreign investors into emerging market assets. Many analysts warned that these flows were short-lived and that an eventual normalization of the Fed’s monetary policy would lead to a mass exodus of investors from emerging markets, especially from fixed income. Peru has experienced significant inflows from foreign investors into local currency government bonds (BTP). However, the high share of foreigners in outstanding BTPs entails risks associated with local markets’ ability to face an abrupt exit of these investors, given their limited liquidity. Along these lines, the aim of this paper is to assess the behavior of Peru’s financial markets and their participants after the Fed’s initial tapering talks in May 2013. The paper places special emphasis on the behavior of foreign investors and the measures taken by the Peruvian Central Bank.