Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>Even as the US 10y yield has come off the peak, rates in emerging markets – including in Asia – have been selling off as they remain under pressure.</li>
<li>Rates in Asia are vulnerable as they are expensive vis-à-vis the rest of EM, rising inflation should result in further rate hikes in the region, and debt profiles have deteriorated.</li>
<li>I thus expect rates in Asia to underperform and prefer selling bonds in the region paired with long bond positions in countries in other regions.</li>
</ul>


Even as the US 10y yield has come off the peak, rates in emerging markets – including in Asia – have been selling off as they remain under pressure.
Rates in Asia are vulnerable as they are expensive vis-à-vis the rest of EM, rising inflation should result in further rate hikes in the region, and debt profiles have deteriorated.
I thus expect rates in Asia to underperform and prefer selling bonds in the region paired with long bond positions in countries in other regions.


Yields in Asia Are Far from the Peak – Part II

<ul>
<li>With the Brazilian central bank approaching the end of its aggressive monetary tightening cycle, the rate curve has taken a unique shape that features a hump and a kink.</li>
<li>The hump should get more pronounced because the rate-cutting cycle should be deeper than currently priced because real rates are quite elevated and growth risks are high.</li>
<li>The kink should also get more prominent as the curve should steepen further out due to fiscal risks irrespective of who wins the upcoming presidential election.</li>
</ul>


With the Brazilian central bank approaching the end of its aggressive monetary tightening cycle, the rate curve has taken a unique shape that features a hump and a kink.
The hump should get more pronounced because the rate-cutting cycle should be deeper than currently priced because real rates are quite elevated and growth risks are high.
The kink should also get more prominent as the curve should steepen further out due to fiscal risks irrespective of who wins the upcoming presidential election.


The Hump and Kink in Brazil’s Yield Curve to Become More Pronounced

<ul>
<li>With US rates reaching the highest levels in a decade, it is not a surprise that the volatility is spilling over to emerging markets.</li>
<li>While South African local bonds had weathered the volatility in 2021 well, this time around, they have gone from outperforming against the rest of EM to underperforming.</li>
<li>Besides external drivers, domestic factors have turned negative as well – particularly rising inflation and worsening debt profile – indicating that rates in South Africa should continue to underperform.</li>
</ul>


With US rates reaching the highest levels in a decade, it is not a surprise that the volatility is spilling over to emerging markets.
While South African local bonds had weathered the volatility in 2021 well, this time around, they have gone from outperforming against the rest of EM to underperforming.
Besides external drivers, domestic factors have turned negative as well – particularly rising inflation and worsening debt profile – indicating that rates in South Africa should continue to underperform.


South African Bonds Switch from Outperformers to Underperformers

<ul>
<li>Notwithstanding the economic uncertainties, with the Fed’s path better defined now than a few weeks ago, I expect the volatility of rates to peak in the coming weeks.</li>
<li>Uncertainty around the Fed's rate hikes has been spilling over to the monetary policy paths of EM countries even though many of them have been raising rates since last year.</li>
<li>If the US rates volatility falls as I expect, then it will be supportive of the short ends of EM rate curves in Latin American and Central European countries.</li>
</ul>


Notwithstanding the economic uncertainties, with the Fed’s path better defined now than a few weeks ago, I expect the volatility of rates to peak in the coming weeks.
Uncertainty around the Fed's rate hikes has been spilling over to the monetary policy paths of EM countries even though many of them have been raising rates since last year.
If the US rates volatility falls as I expect, then it will be supportive of the short ends of EM rate curves in Latin American and Central European countries.


<ul>
<li>Rates in Asia are among the worst performers this year, but they remain expensive – relative to the US and to their own history – and should continue to underperform.</li>
<li>Other reasons for rates in Asia to sell off include: a marked increase in inflation, low projected real rates, currencies turning volatile, and deteriorating debt profiles.</li>
<li>I like paying rates in Asia by pairing them with receivers in countries in other regions. China is an exception in the region as it remains in an easing mode.</li>
</ul>


Rates in Asia are among the worst performers this year, but they remain expensive – relative to the US and to their own history – and should continue to underperform.
Other reasons for rates in Asia to sell off include: a marked increase in inflation, low projected real rates, currencies turning volatile, and deteriorating debt profiles.
I like paying rates in Asia by pairing them with receivers in countries in other regions. China is an exception in the region as it remains in an easing mode.


Czech Republic

A vanila interest rate swap us an agreement between two counterparties to exchange cashflows (fixed vs floating) in the same currency. This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa. The payments are made during the life of the swap in the frequency that is pre-established by the counterparties.

CZK 10Y (CKSW10 CURNCY)

Yields in Asia Are Far from the Peak – Part II

Rates in Asia are vulnerable to further correction as they are expensive versus the rest of EM, rising inflation should result in further rate...

Gautam Jain, PhD, CFA

The Hump and Kink in Brazil’s Yield Curve to Become More Pronounced

I expect the hump and kink in Brazil's rate curve to get more pronounced as a deeper rate-cutting cycle should get priced in and the curve should...

Gautam Jain, PhD, CFA

South African Bonds Switch from Outperformers to Underperformers

Besides external drivers, domestic factors have turned negative in South Africa – particularly rising inflation and worsening debt profile –...

Gautam Jain, PhD, CFA

How Are Fed’s Rate Hikes Impacting EM?

I expect the volatility of rates to peak in the coming weeks, which should be supportive of the short ends of EM rate curves in Latin American and...

Gautam Jain, PhD, CFA

Yields in Asia Are Far from the Peak

Rates in Asia are among the worst performers this year, but they should continue to underperform on the back of expensive valuations, rising...

Gautam Jain, PhD, CFA