Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>With US rates reaching the highest levels in a decade, it is not a surprise that the volatility is spilling over to emerging markets.</li>
<li>While South African local bonds had weathered the volatility in 2021 well, this time around, they have gone from outperforming against the rest of EM to underperforming.</li>
<li>Besides external drivers, domestic factors have turned negative as well – particularly rising inflation and worsening debt profile – indicating that rates in South Africa should continue to underperform.</li>
</ul>


With US rates reaching the highest levels in a decade, it is not a surprise that the volatility is spilling over to emerging markets.
While South African local bonds had weathered the volatility in 2021 well, this time around, they have gone from outperforming against the rest of EM to underperforming.
Besides external drivers, domestic factors have turned negative as well – particularly rising inflation and worsening debt profile – indicating that rates in South Africa should continue to underperform.


South African Bonds Switch from Outperformers to Underperformers

<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>US rates are trapped between inflationary pressures on one hand, and risk aversion and growth uncertainty on the other, with the latter dominating for now.</li>
<li>The previous strong correlation of EM rates with the US has now flipped as they continue to rise even with US rates rallying.</li>
<li>The spread of EM rates to the US is at its widest in a decade but it should remain that way as long as rates volatility remains high.</li>
</ul>


US rates are trapped between inflationary pressures on one hand, and risk aversion and growth uncertainty on the other, with the latter dominating for now.
The previous strong correlation of EM rates with the US has now flipped as they continue to rise even with US rates rallying.
The spread of EM rates to the US is at its widest in a decade but it should remain that way as long as rates volatility remains high.


EM Rates Detach from the US Amid Russian Contagion

<ul>
<li>Following the invasion of Ukraine by Russia, it is only a matter of time before the US and other western allies impose a new set of economic sanctions on Russia</li>
<li>A directive from the US Treasury this week expanded the restrictions on Russian bonds as it prohibits participating in the secondary market of new bonds, thereby cutting financing for Russia. </li>
<li>With new sanctions on the way, the risks to Russian bonds have increased. I list the possible risks for holders of Russian bonds under different scenarios.</li>
</ul>


Following the invasion of Ukraine by Russia, it is only a matter of time before the US and other western allies impose a new set of economic sanctions on Russia
A directive from the US Treasury this week expanded the restrictions on Russian bonds as it prohibits participating in the secondary market of new bonds, thereby cutting financing for Russia. 
With new sanctions on the way, the risks to Russian bonds have increased. I list the possible risks for holders of Russian bonds under different scenarios.


Risks to Russian Bonds from Escalating Sanctions

<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?

South Africa

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.

ZAR 10Y (SASW10 CURNCY)

South African Bonds Switch from Outperformers to Underperformers

Besides external drivers, domestic factors have turned negative in South Africa – particularly rising inflation and worsening debt profile –...

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

EM Rates Detach from the US Amid Russian Contagion

The spread of EM rates to the US is at its widest in a decade but it should remain that way as long as rates volatility remains high, given the...

Gautam Jain, PhD, CFA

Risks to Russian Bonds from Escalating Sanctions

With new sanctions on the way, the risks to Russian bonds have increased. I list the possible risks for holders of Russian bonds under different...

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