Washington, D.C., April 1, 2015 - Uncertainty about how and when the Fed will engineer an increase in the Fed funds rate has led to a notable rise in volatility in the U.S. rate market, according to two new research notes by the Institute of International Finance.

In this month's CMM Key Issues , the IIF noted that corporate sectors in many emerging market countries now have significant USD liabilities, in both bank loans and bonds.'  While some of this exposure may be effectively hedged, a number of EM countries are likely to face daunting debt servicing and refinancing risks in the next few years.

"gainst this backdrop, and with further U.S. dollar strength in prospect, portfolio capital flows to emerging markets have been subdued-but with a high degree of differentiation" said Hung Tran, executive managing director at the IIF. "EM countries that have implemented sensible macroeconomic policies with a reasonable reform agenda to boost economic potential have been much more resilient-good policy pays off."

"In particular, emerging market non-financial corporate debt reached a record high of 83 percent of GDP on average in 2014, raising significant issues for emerging market corporates as U.S. monetary policy conditions begin to normalize." said Tran.

In an accompanying CMM Research Note , IIF analysts noted that the rise in the debt of the EM non-financial corporate sector has worrisome implications:'

• It may be a challenge to incur new debt at a pace sufficient to support robust growth on a sustained basis;
• The debt service burden and default risk are set to rise as monetary conditions normalize; and
• As some non-financial corporates in emerging markets are not hedged against the risk of currency mismatch, this risk could translate into credit risk for banks

The IIF noted that overall EM issuance has slowed since 2013, and that a reduction in investor appetite for EM local currency debt securities may help explain the shift towards more hard currency debt issuance.

The IIF estimates that some $645 billion of emerging market non-financial corporate bonds will mature between 2015 and 2017, with USD-denominated bonds accounting for around $108 billion of that total.

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The Institute of International Finance is the global association of the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. Within its membership the IIF counts commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. For more information visit www.iif.com.