Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<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

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

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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CZK 10Y (CKSW10 CURNCY)

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

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

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