Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>Barring the spike at the start of the pandemic, US rates volatility is close to the upper end of the 10-year range, which does not bode well for EM rates.</li>
<li>EM rates have sold off relative to the US at a much faster pace than in other similar episodes on a combination of fiscal deterioration, monetary tightening, and political noise.</li>
<li>While the spread of EM local rates to the US is extremely wide, it is prudent to be selective and focus on relative-value and curve trades to minimize risks.</li>
</ul>


Barring the spike at the start of the pandemic, US rates volatility is close to the upper end of the 10-year range, which does not bode well for EM rates.
EM rates have sold off relative to the US at a much faster pace than in other similar episodes on a combination of fiscal deterioration, monetary tightening, and political noise.
While the spread of EM local rates to the US is extremely wide, it is prudent to be selective and focus on relative-value and curve trades to minimize risks.


EM Local Rates in the Line of Fire as US Rates Volatility Spikes Higher

<ul>
<li>Rates in Asia have sold off as rates globally have risen due to increasing inflationary pressures. However, rates in Asia have risen by less in comparison with the US.</li>
<li>The main reason behind the better performance of rates in Asia is the outperformance of Indonesia and China with both countries benefiting from high real rates.</li>
<li>Looking ahead, a continued rise in rates in the US makes Indonesian local bonds vulnerable to a correction, but rates in China may continue to outperform in my view.</li>
</ul>


Rates in Asia have sold off as rates globally have risen due to increasing inflationary pressures. However, rates in Asia have risen by less in comparison with the US.
The main reason behind the better performance of rates in Asia is the outperformance of Indonesia and China with both countries benefiting from high real rates.
Looking ahead, a continued rise in rates in the US makes Indonesian local bonds vulnerable to a correction, but rates in China may continue to outperform in my view.


How Are Rates in Asia Reacting to the Rise in US Yields?

<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

<ul>
<li>US yields have jumped higher and the US dollar has strengthened on the back of higher-than-expected inflation prints and speculation of change at the Fed's helm.</li>
<li>EM rates have also moved higher as their correlation with US rates is currently on the high end of the historical range.</li>
<li>The bout of volatility has resulted in outliers, and therefore potential trading opportunities, within EM countries based on their performance relative to their respective betas.</li>
</ul>


US yields have jumped higher and the US dollar has strengthened on the back of higher-than-expected inflation prints and speculation of change at the Fed's helm.
EM rates have also moved higher as their correlation with US rates is currently on the high end of the historical range.
The bout of volatility has resulted in outliers, and therefore potential trading opportunities, within EM countries based on their performance relative to their respective betas.


Outliers Within EM Rates Amid Rising Volatility of US Rates

<p>Poland's central bank surprised the market with an aggressive rate hike of 75 bp last week when the expectation was for 25 bp. This action supported my long-held recommendation to pay Poland 5y against receiving Czech 5y rate. However, I recommend holding on to the trade as the central bank remains behind the curve with inflation continuing to be a concern. Moreover, the government is adding further fiscal stimulus, which should be inflationary as well. Finally, Poland's ongoing row with the EU may result in the latter withholding funds, which if it were to happen would be negative for all Polish assets.</p><p>Separately, the attached file is a snapshot of the EM 10y rates market in which I 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.</p>

Poland's central bank surprised the market with an aggressive rate hike of 75 bp last week when the expectation was for 25 bp. This action supported my long-held recommendation to pay Poland 5y against receiving Czech 5y rate. However, I recommend holding on to the trade as the central bank remains behind the curve with inflation continuing to be a concern. Moreover, the government is adding further fiscal stimulus, which should be inflationary as well. Finally, Poland's ongoing row with the EU may result in the latter withholding funds, which if it were to happen would be negative for all Polish assets.Separately, the attached file is a snapshot of the EM 10y rates market in which I 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.

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RUB 10Y (RRSWM10 CURNCY)

EM Local Rates in the Line of Fire as US Rates Volatility Spikes Higher

With EM rates selling off relative to the US at a much faster pace than in other similar episodes in the past, it is prudent to focus on relative...

Gautam Jain, PhD, CFA

How Are Rates in Asia Reacting to the Rise in US Yields?

Rates in Asia have sold off but less than global rates mainly due to the outperformance of Indonesia and China, with the former looking more...

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

Outliers Within EM Rates Amid Rising Volatility of US Rates

The bout of volatility ins US rates has resulted in outliers, and therefore potential trading opportunities, within EM countries based on their...

Gautam Jain, PhD, CFA

Rates in Poland Catching up With Peers

Poland's surprisingly aggressive rate hike last week was supportive of my recommendation to pay Poland 5y vs Czech 5y, which I suggest continuing...

Gautam Jain, PhD, CFA

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