Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>With the volatility of US rates remaining elevated, it is a good time to evaluate how my thematic recommendation for 2022 of curve steepening trades in EM is playing out.</li>
<li>The slopes of rate curves in EM have stabilized even as they continue to flatten in the US and, more broadly, DM – a break in correlation that should persist.</li>
<li>EM curves should start steepening as ex-Asia they are ahead of DM in rate-hiking cycles and their worsening debt dynamics should keep the risk premium elevated in the long end.</li>
</ul>


With the volatility of US rates remaining elevated, it is a good time to evaluate how my thematic recommendation for 2022 of curve steepening trades in EM is playing out.
The slopes of rate curves in EM have stabilized even as they continue to flatten in the US and, more broadly, DM – a break in correlation that should persist.
EM curves should start steepening as ex-Asia they are ahead of DM in rate-hiking cycles and their worsening debt dynamics should keep the risk premium elevated in the long end.


An Update on High Conviction 2022 Thematic Rate Curve Steepening Trades in EM

<ul>
<li>In the current environment of upside risks to global rates, it is appropriate to look for countries where one can position for rates to move higher with limited downside.</li>
<li>From this perspective, I like shorting long-end rates in Colombia ahead of the upcoming presidential election in May where a leftist candidate is leading in the polls.</li>
<li>The political risk premium should rise in Colombia using the increase in rates in Peru and Chile last year as guidance since both countries went through similar election-related political turmoil.</li>
</ul>


In the current environment of upside risks to global rates, it is appropriate to look for countries where one can position for rates to move higher with limited downside.
From this perspective, I like shorting long-end rates in Colombia ahead of the upcoming presidential election in May where a leftist candidate is leading in the polls.
The political risk premium should rise in Colombia using the increase in rates in Peru and Chile last year as guidance since both countries went through similar election-related political turmoil.


In an Environment of Rising Rates, Colombia 10y Local Rate Is a Good Short

<ul>
<li>Colombia’s rate curve has flattened with the central bank picking up the pace of rate hikes and the long end experiencing relief following the rating downgrades earlier in the year.</li>
<li>The curve may have flattened too much with excessive rate hikes priced in and the long end vulnerable ahead of next year’s presidential election, where a leftist candidate leads.</li>
<li>I recommend a DV01-neutral 5s10s steepening trade, whose high positive carry should provide some protection if the current global flattening trend continues.</li>
</ul>


Colombia’s rate curve has flattened with the central bank picking up the pace of rate hikes and the long end experiencing relief following the rating downgrades earlier in the year.
The curve may have flattened too much with excessive rate hikes priced in and the long end vulnerable ahead of next year’s presidential election, where a leftist candidate leads.
I recommend a DV01-neutral 5s10s steepening trade, whose high positive carry should provide some protection if the current global flattening trend continues.


Alpha Bites: A DV01-Neutral 5s10s Rate Curve Steepener in Colombia

US rates volatility has picked up again and is close to the highs of the year despite the US 10y yield dropping. With rising US rates volatility, the EM-US 10y spread is now close to its widest in 5 years, suggesting that if US long-end rates stay low then EM local debt can start attracting inflows. We use two factors to identify some of the countries that may be targeted for inflows.Separately, the attached file is a snapshot of the EM 10y rates market in which we 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.

US rates volatility has picked up again and is close to the highs of the year despite the US 10y yield dropping. With rising US rates volatility, the EM-US 10y spread is now close to its widest in 5 years, suggesting that if US long-end rates stay low then EM local debt can start attracting inflows. We use two factors to identify some of the countries that may be targeted for inflows.Separately, the attached file is a snapshot of the EM 10y rates market in which we 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: Attractive Yield Pick-Up of EM Local Debt over DM

We expect South Africa's rate curve to steepen as recent riots have slowed the economic recovery, likely pushing monetary tightening further out. Meanwhile, the worsening fiscal balance and outflows should pressure the long end higher. Instead of positioning for steepening now, we would wait for the curve to steepen to enter a flattener.Separately, the attached file is a snapshot of the EM 10y rates market in which we 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.

We expect South Africa's rate curve to steepen as recent riots have slowed the economic recovery, likely pushing monetary tightening further out. Meanwhile, the worsening fiscal balance and outflows should pressure the long end higher. Instead of positioning for steepening now, we would wait for the curve to steepen to enter a flattener.Separately, the attached file is a snapshot of the EM 10y rates market in which we 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: South Africa’s Rate Curve Set to Steepen

Colombia

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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An Update on High Conviction 2022 Thematic Rate Curve Steepening Trades in EM

Revisiting my thematic recommendation for 2022, EM rate curves should start steepening as ex-Asia they are ahead of DM in rate-hiking cycles and...

Gautam Jain, PhD, CFA

In an Environment of Rising Rates, Colombia 10y Local Rate Is a Good Short

I like paying Colombia 10y as the political risk premium should increase going into the presidential election in May based on similar episodes in...

Gautam Jain, PhD, CFA

Alpha Bites: A DV01-Neutral 5s10s Rate Curve Steepener in Colombia

I recommend a steepening trade in Colombia as it may have flattened too much with excessive rate hikes priced in and the long end vulnerable to a...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Attractive Yield Pick-Up of EM Local Debt over DM

With rising US rates volatility, the EM-US 10y spread is now close to its widest in 5 years, suggesting that if US long-end rates stay low then EM...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: South Africa’s Rate Curve Set to Steepen

We expect South Africa's rate curve to steepen as recent riots have slowed the economic recovery, likely pushing rate hikes further out. We would...

Gautam Jain, PhD, CFA

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52-week Range

Market Cap (USDm)

P/E

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