Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<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

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.

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.

The rate curve in the US has been flattening lately as the short-end moved higher with rate hikes getting priced and the long end coming off the peak. Other countries have followed the flattening trend, including in emerging markets (EM). In contrast with the US though, EM rate curves have flattened more dramatically and have experienced bear-flattening. The recent trend allowed me to suggest taking profits on some of my flattening recommendations, but has worked against my steepening recommendations. Given the extreme levels, however, I recommend continuing to hold on to the steepeners for now.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.

The rate curve in the US has been flattening lately as the short-end moved higher with rate hikes getting priced and the long end coming off the peak. Other countries have followed the flattening trend, including in emerging markets (EM). In contrast with the US though, EM rate curves have flattened more dramatically and have experienced bear-flattening. The recent trend allowed me to suggest taking profits on some of my flattening recommendations, but has worked against my steepening recommendations. Given the extreme levels, however, I recommend continuing to hold on to the steepeners for now.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.

Flattening of Rate Curves in EM Far Exceeds the US

Since late September, the US 10y yield has moved higher by around 30 bp while EM 10y rates have risen even more by over 50 bp on average. Peru is the only major EM country where rates have rallied even as they have sold off elsewhere. Several drivers have been behind the recent rally in Peru’s rates. The most prominent ones are signs of moderation by the president as he shuffled his cabinet and ratified the market-friendly central bank governor. The rally, however, looks overdone as the post-election risk premium has been erased and the 10y yield in Peru is low in comparison with the volatility which is expected to remain high. I would thus look for opportunities to pay long-end rates in Peru against another country.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.

Since late September, the US 10y yield has moved higher by around 30 bp while EM 10y rates have risen even more by over 50 bp on average. Peru is the only major EM country where rates have rallied even as they have sold off elsewhere. Several drivers have been behind the recent rally in Peru’s rates. The most prominent ones are signs of moderation by the president as he shuffled his cabinet and ratified the market-friendly central bank governor. The rally, however, looks overdone as the post-election risk premium has been erased and the 10y yield in Peru is low in comparison with the volatility which is expected to remain high. I would thus look for opportunities to pay long-end rates in Peru against another country.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.

Rates 10y Dashboard: Rally in Peru’s Rates Is Overdone

Russia's monetary policy decision tomorrow is a close call with consensus expectations of a 50 bp hike. I expect a smaller 25 bp rate hike but with hawkish messaging. Although inflation increased sharply in September, it was driven primarily by food prices. In the face of rising economic uncertainty due to new restrictions with daily coronavirus cases reaching the highest level, CBR should be cautious in tightening monetary policy. Moreover, the previous rate hikes and the recent currency strengthening should have a disinflationary impact with a lag. If the CBR moves as I expect, it should be supportive of my 2s5s steepener recommendation.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.

Russia's monetary policy decision tomorrow is a close call with consensus expectations of a 50 bp hike. I expect a smaller 25 bp rate hike but with hawkish messaging. Although inflation increased sharply in September, it was driven primarily by food prices. In the face of rising economic uncertainty due to new restrictions with daily coronavirus cases reaching the highest level, CBR should be cautious in tightening monetary policy. Moreover, the previous rate hikes and the recent currency strengthening should have a disinflationary impact with a lag. If the CBR moves as I expect, it should be supportive of my 2s5s steepener recommendation.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.

Rates 10y Dashboard: Russia to Deliver a Small Rate Hike Supporting the Steepener Recommendation

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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

Flattening of Rate Curves in EM Far Exceeds the US

The recent rate curve flattening trend has allowed me to suggest taking profits on some of my trade recommendations but has hurt the steepening...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Rally in Peru’s Rates Is Overdone

The recent shift towards the center by Peru's newly-elected president has caused the country's bonds to rally sharply. While a drop in risk premium...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Russia to Deliver a Small Rate Hike Supporting the Steepener Recommendation

Despite high inflation, Russia should raise the policy rate by less than consensus due to new restrictions as Covid cases have risen sharply. This...

Gautam Jain, PhD, CFA

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