Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<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

<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?

Czech Republic

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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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

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

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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