Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

In this edition of Alpha Bites, I list my current open trade recommendations in EM FX and rates along with links to notes where I discuss the trades in more detail. The tables include expected returns on the trades on a 3-month horizon assuming mean reversion in this period.

In this edition of Alpha Bites, I list my current open trade recommendations in EM FX and rates along with links to notes where I discuss the trades in more detail. The tables include expected returns on the trades on a 3-month horizon assuming mean reversion in this period.

Alpha Bites: Current Trade Recommendations in EM FX and Rates

The sell-off in US rates in the aftermath of the hawkish Fed has spilled over to other countries. Within EM rates, we identify the dislocations, which are typical during periods when volatility rises. We are able to explain away most of the dislocations except for Poland and Czechia. Indeed, we have two outstanding trade recommendations in these countries to reflect our view.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

The sell-off in US rates in the aftermath of the hawkish Fed has spilled over to other countries. Within EM rates, we identify the dislocations, which are typical during periods when volatility rises. We are able to explain away most of the dislocations except for Poland and Czechia. Indeed, we have two outstanding trade recommendations in these countries to reflect our view.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Identifying Dislocations Among EM Rates as US Rates Sell Off

In this week’s Alpha Bites, we recommend receiving the 5-year rate vs paying the 10-year rate in Czechia. Following the larger-than-expected 75 bp rate hike by the central bank last week, the entire rate curve has moved higher. The sell-off in the 5-year tenor, in particular, seems overdone because if the central bank is expected to continue to be hawkish, then it would be ahead of the curve in bringing inflation within its target band. The risk premium should therefore not be as high further out in the curve. The Czech 5s10s curve is now inverted in contrast with the rest of EM, providing an ideal opportunity to initiate a steepener in our view.

In this week’s Alpha Bites, we recommend receiving the 5-year rate vs paying the 10-year rate in Czechia. Following the larger-than-expected 75 bp rate hike by the central bank last week, the entire rate curve has moved higher. The sell-off in the 5-year tenor, in particular, seems overdone because if the central bank is expected to continue to be hawkish, then it would be ahead of the curve in bringing inflation within its target band. The risk premium should therefore not be as high further out in the curve. The Czech 5s10s curve is now inverted in contrast with the rest of EM, providing an ideal opportunity to initiate a steepener in our view.

Alpha Bites: A DV01-Neutral 5s10s Steepener in Czechia

Even though EM rate curves have been flattening in line with the US, rates in EM have underperformed the rally in the US. The main difference is unlike the US, and DM more generally, emerging countries have broadly started tightening monetary policy. Real rates in EM are thus much higher than in the US. We continue to find the spread of EM to the US attractive, especially with EM rates volatility dropping below its long-term average.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Even though EM rate curves have been flattening in line with the US, rates in EM have underperformed the rally in the US. The main difference is unlike the US, and DM more generally, emerging countries have broadly started tightening monetary policy. Real rates in EM are thus much higher than in the US. We continue to find the spread of EM to the US attractive, especially with EM rates volatility dropping below its long-term average.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Higher Real Rates in EM than in DM

In our monthly trade ideas recap note, we provide a performance update of the trade recommendations in FX and rates that we make weekly and discuss the new recommendations as well as those we closed over the past month. We have made a total of 21 trade recommendations so far, of which 15 are in the money.

In our monthly trade ideas recap note, we provide a performance update of the trade recommendations in FX and rates that we make weekly and discuss the new recommendations as well as those we closed over the past month. We have made a total of 21 trade recommendations so far, of which 15 are in the money.

Alpha Bites: Performance Summary of Trade Recommendations – August 2021

Czech Republic

A vanilla 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.

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CZK 5Y (CKSW5 CURNCY)

Alpha Bites: Current Trade Recommendations in EM FX and Rates

In this edition of Alpha Bites, I list my current open trade recommendations in EM FX and rates along with links to notes where I discuss the...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Identifying Dislocations Among EM Rates as US Rates Sell Off

Of the dislocations within EM rates that followed the sell-off in US rates, we can explain away most except for Poland and Czechia, where we have...

Gautam Jain, PhD, CFA

Alpha Bites: A DV01-Neutral 5s10s Steepener in Czechia

The Czech rates curve has overreacted to the central bank’s aggressive tightening in our view and the 5s10s curve is now inverted, providing an...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Higher Real Rates in EM than in DM

Real rates in EM are much higher than in the US, making the spread of EM local debt to the US attractive, especially with EM rates volatility...

Gautam Jain, PhD, CFA

Alpha Bites: Performance Summary of Trade Recommendations – August 2021

We provide a performance update of all our trade recommendations along with discussing the new trades from last month. We have made a total of 21...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)