Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>Rates in emerging countries are rising with the US, but they are outperforming. As an example, Mexico's spread to the US remains high but is off the peak.</li>
<li>Inflationary pressures, including elevated inflation expectations and breakeven, argue for a high spread. On the other hand, aggressive rate hikes are priced and real rates are already high.</li>
<li>With inflation likely to peak soon, I find rates in Mexico high enough to receive and have a trade recommendation accordingly, even though there are arguments on both sides.</li>
</ul>


Rates in emerging countries are rising with the US, but they are outperforming. As an example, Mexico's spread to the US remains high but is off the peak.
Inflationary pressures, including elevated inflation expectations and breakeven, argue for a high spread. On the other hand, aggressive rate hikes are priced and real rates are already high.
With inflation likely to peak soon, I find rates in Mexico high enough to receive and have a trade recommendation accordingly, even though there are arguments on both sides.


<ul>
<li>With global rate curves bear-flattening, slopes in several emerging countries have reached extreme levels, arguing for steepening trades. I discuss the arguments for and against a steepening trade in Chile.</li>
<li>The main arguments in favor are the slowing growth and inflation likely peaking in the coming months, which imply that the monetary tightening may be in the late stages.</li>
<li>To initiate the trade, I prefer to wait until the MPC meeting later this month for the central bank to provide more clarity on the potential duration of the cycle.</li>
</ul>


With global rate curves bear-flattening, slopes in several emerging countries have reached extreme levels, arguing for steepening trades. I discuss the arguments for and against a steepening trade in Chile.
The main arguments in favor are the slowing growth and inflation likely peaking in the coming months, which imply that the monetary tightening may be in the late stages.
To initiate the trade, I prefer to wait until the MPC meeting later this month for the central bank to provide more clarity on the potential duration of the cycle.


Does Chile’s Rate Curve Flattening Offer an Opportunity?

<ul>
<li>Mexico's rate curve steepened following the last monetary policy meeting, suggesting that the market was expecting a bigger rate hike than the 25 bp delivered.</li>
<li>I expect the curve to resume bear-flattening as the curve prices in more rate hikes on the back of high inflation and growth turning positive again in Q4.</li>
<li>The pace of rate hikes may be increased when the new governor takes the helm in 2022, rather than at the December meeting.</li>
</ul>


Mexico's rate curve steepened following the last monetary policy meeting, suggesting that the market was expecting a bigger rate hike than the 25 bp delivered.
I expect the curve to resume bear-flattening as the curve prices in more rate hikes on the back of high inflation and growth turning positive again in Q4.
The pace of rate hikes may be increased when the new governor takes the helm in 2022, rather than at the December meeting.


Mexico’s Rate Curve to Continue Bear-Flattening

Following the higher-than-expected CPI data in the US, rates volatility has risen which raises the question of whether the flattening trend that had taken hold in the US and EM should persist. In the long run, we still expect curves to flatten, but in the short term, the shape of the curve is likely to be data-driven. As a result, our current trade recommendations, which include a flattener in Colombia and a steepener in Russia, are idiosyncratic.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.

Following the higher-than-expected CPI data in the US, rates volatility has risen which raises the question of whether the flattening trend that had taken hold in the US and EM should persist. In the long run, we still expect curves to flatten, but in the short term, the shape of the curve is likely to be data-driven. As a result, our current trade recommendations, which include a flattener in Colombia and a steepener in Russia, are idiosyncratic.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: Should Curve Flattening Persist with Rising Rates Volatility?

We evaluate where in Asia would it be worthwhile to be long duration under our baseline scenario of US rates volatility staying low for the rest of the summer. To do so, we use carry, potential capital gains, and the correlation with the US as the primary metrics.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.

We evaluate where in Asia would it be worthwhile to be long duration under our baseline scenario of US rates volatility staying low for the rest of the summer. To do so, we use carry, potential capital gains, and the correlation with the US as the primary metrics.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: Where in Asia Is Duration Risk Worthwhile?

Mexico

MXN Monthly (vs. 28D TIIE)
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.

MXN 10Y (MPSW10K CURNCY)

Are Mexico’s Local Bonds Cheap?

With inflation likely to peak soon, I find rates in Mexico high enough to receive and have a trade recommendation accordingly, even though there...

Gautam Jain, PhD, CFA

Does Chile’s Rate Curve Flattening Offer an Opportunity?

With global rate curves bear-flattening, slopes in several emerging countries have reached extreme levels, arguing for steepeners. I discuss the...

Gautam Jain, PhD, CFA

Mexico’s Rate Curve to Continue Bear-Flattening

I expect Mexico's curve to resume bear-flattening as the curve prices in more rate hikes on the back of high inflation and growth turning positive...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Should Curve Flattening Persist with Rising Rates Volatility?

Higher rates volatility raises questions regarding the flattening trend in the US and EM. In the long run, curves should flatten, but in the short...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Where in Asia Is Duration Risk Worthwhile?

We evaluate where in Asia would it be worthwhile to be long duration using carry, potential capital gains, and the correlation with the US as the...

Gautam Jain, PhD, CFA