Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>The risk of US yields continuing to rise is high especially with inflation not having peaked yet, the Fed potentially reducing its balance sheet, and real rates still negative.</li>
<li>The high volatility in US rates does not bode well for EM rates due to their high correlation even though EM local debt is overall cheap based on most metrics.</li>
<li>Until the volatility in US rates subsides, it is best to focus on cross-country and curve trades in EM, with my preference for curve steepening trades in several countries.</li>
</ul>


The risk of US yields continuing to rise is high especially with inflation not having peaked yet, the Fed potentially reducing its balance sheet, and real rates still negative.
The high volatility in US rates does not bode well for EM rates due to their high correlation even though EM local debt is overall cheap based on most metrics.
Until the volatility in US rates subsides, it is best to focus on cross-country and curve trades in EM, with my preference for curve steepening trades in several countries.


What to Expect of EM Rates When Expecting US Rates to Stay Volatile?

<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>The performance of EM rates this year should be driven primarily by the behavior of US rates and domestic monetary policy, with fiscal policy playing less of a role.</li>
<li>Among the outliers in 2021, the moves in Indonesia, Poland, and Hungary were appropriate, but Brazil looks vulnerable. Instead of an outright payer in Brazil though, I like a steepener.</li>
<li>Besides Brazil, I like steepening trades in Russia, Czechia, and Colombia as curves should bull-steepen this year. Another one to track this year with a similar idea is Chile.</li>
</ul>


The performance of EM rates this year should be driven primarily by the behavior of US rates and domestic monetary policy, with fiscal policy playing less of a role.
Among the outliers in 2021, the moves in Indonesia, Poland, and Hungary were appropriate, but Brazil looks vulnerable. Instead of an outright payer in Brazil though, I like a steepener.
Besides Brazil, I like steepening trades in Russia, Czechia, and Colombia as curves should bull-steepen this year. Another one to track this year with a similar idea is Chile.


Gems Among Stones: EM Rates’ 2021 Performance and What to Expect in 2022

<ul>
<li>Rates in emerging countries, particularly in the long end, have been selling off. Among the worst performers are Central European (CE) countries when adjusted for their respective betas.</li>
<li>The main driver of the underperformance of CE rates is sharply rising inflation as a result of the powerful fiscal and monetary stimulus provided in response to the pandemic. </li>
<li>Despite the underperformance of CE rates, I don't recommend receiving them against EU rates yet as real rates are still on the low side in comparison with other EM countries.</li>
</ul>


Rates in emerging countries, particularly in the long end, have been selling off. Among the worst performers are Central European (CE) countries when adjusted for their respective betas.
The main driver of the underperformance of CE rates is sharply rising inflation as a result of the powerful fiscal and monetary stimulus provided in response to the pandemic. 
Despite the underperformance of CE rates, I don't recommend receiving them against EU rates yet as real rates are still on the low side in comparison with other EM countries.


Central European Rates Are Among the Hardest Hit in EM

<ul>
<li>With the market struggling to price in the Fed’s likely monetary tightening path, US rates have become quite volatile and likely to stay that way in the near term.</li>
<li>With US rates volatility rising, it has spilled over to other markets, particularly EM rates whose correlation with the US has increased considerably even on an individual country basis.</li>
<li>Typically, increased volatility in EM rates results in more trading opportunities because it leads to greater differentiation within EM. This time around, that has generally not been the case.</li>
</ul>


With the market struggling to price in the Fed’s likely monetary tightening path, US rates have become quite volatile and likely to stay that way in the near term.
With US rates volatility rising, it has spilled over to other markets, particularly EM rates whose correlation with the US has increased considerably even on an individual country basis.
Typically, increased volatility in EM rates results in more trading opportunities because it leads to greater differentiation within EM. This time around, that has generally not been the case.


Higher Correlation with US Yields but Less Differentiation Within EM Rates

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

RUB 10Y (RRSWM10 CURNCY)

What to Expect of EM Rates When Expecting US Rates to Stay Volatile?

The high volatility in US rates does not bode well for EM rates due to their high correlation even though EM local debt is overall cheap. Cross...

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

Gems Among Stones: EM Rates’ 2021 Performance and What to Expect in 2022

Among the outliers in 2021, Brazil looks vulnerable. Instead of an outright payer though, I like a curve steepening trade in Brazil as I do in...

Gautam Jain, PhD, CFA

Central European Rates Are Among the Hardest Hit in EM

Central European rates have been among the worst performers in the global rates sell-off. Despite the underperformance, I don't recommend receiving...

Gautam Jain, PhD, CFA

Higher Correlation with US Yields but Less Differentiation Within EM Rates

Higher US volatility has spilled over to EM. Typically, increased volatility results in more trading opportunities because of greater...

Gautam Jain, PhD, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)