Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<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.


<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>Rates volatility remains high with the latest boost coming from the rising probability of a global recession as possible outcomes of the ongoing Fed tightening and Russia's invasion of Ukraine.</li>
<li>After inverting briefly, the US 2s10s slope has started steepening, which should continue despite recessionary risks as the Fed's balance sheet reduction should weigh heavily in the long end.</li>
<li>With the US 5s10s switching to steepening from flattening, the case for similar steepening is strong in a few emerging countries that are ahead in terms of monetary tightening.</li>
</ul>


Rates volatility remains high with the latest boost coming from the rising probability of a global recession as possible outcomes of the ongoing Fed tightening and Russia's invasion of Ukraine.
After inverting briefly, the US 2s10s slope has started steepening, which should continue despite recessionary risks as the Fed's balance sheet reduction should weigh heavily in the long end.
With the US 5s10s switching to steepening from flattening, the case for similar steepening is strong in a few emerging countries that are ahead in terms of monetary tightening.


Global Rate Curves (Ex-Asia) At an Inflection Point

<ul>
<li>Financial markets are dominated by uncertainties being created by Russia's invasion of Ukraine and the potential economic impact of the Fed raising rates and unwinding its balance sheet simultaneously.</li>
<li>The volatility and level of rates in EM are rising with the US but with differentiation: Asia and Central Europe are underperforming, while Latin America is outperforming.</li>
<li>The possibility of binary economic scenarios playing out as a result of the current uncertainties makes me pause for more clarity before making new trade recommendations.</li>
</ul>


Financial markets are dominated by uncertainties being created by Russia's invasion of Ukraine and the potential economic impact of the Fed raising rates and unwinding its balance sheet simultaneously.
The volatility and level of rates in EM are rising with the US but with differentiation: Asia and Central Europe are underperforming, while Latin America is outperforming.
The possibility of binary economic scenarios playing out as a result of the current uncertainties makes me pause for more clarity before making new trade recommendations.


Rates in Asia Underperform Following the Fed Hike and Russia’s Invasion

<ul>
<li>Foreign investments in China’s government bonds had been on the rise in recent years with the market appearing to acquire a safe-haven status as it became more accessible and liquid.</li>
<li>Russia's invasion of Ukraine may have changed this as the country is likely to default despite its large international reserves, which presents spillover risks to others, particularly China.</li>
<li>After suffering heavy losses in Russian holdings, investors are likely to factor in political and geopolitical risks more explicitly going forward, which would work against China.</li>
</ul>


Foreign investments in China’s government bonds had been on the rise in recent years with the market appearing to acquire a safe-haven status as it became more accessible and liquid.
Russia's invasion of Ukraine may have changed this as the country is likely to default despite its large international reserves, which presents spillover risks to others, particularly China.
After suffering heavy losses in Russian holdings, investors are likely to factor in political and geopolitical risks more explicitly going forward, which would work against China.


Early Signs of a Geopolitical Risk Premium in China’s Bonds?

Poland

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.

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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

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

Global Rate Curves (Ex-Asia) At an Inflection Point

With the US 5s10s switching to steepening from flattening, the case for similar steepening is strong in a few emerging countries that are ahead in...

Gautam Jain, PhD, CFA

Rates in Asia Underperform Following the Fed Hike and Russia’s Invasion

With financial markets dominated by uncertainties created by Fed tightening and Russia's invasion, rates in Asia and Central Europe are...

Gautam Jain, PhD, CFA

Early Signs of a Geopolitical Risk Premium in China’s Bonds?

China's government bonds were being viewed as a safe-haven asset but Russia's invasion of Ukraine may have changed this with geopolitical risks...

Gautam Jain, PhD, CFA

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