Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>With the Brazilian central bank approaching the end of its aggressive monetary tightening cycle, the rate curve has taken a unique shape that features a hump and a kink.</li>
<li>The hump should get more pronounced because the rate-cutting cycle should be deeper than currently priced because real rates are quite elevated and growth risks are high.</li>
<li>The kink should also get more prominent as the curve should steepen further out due to fiscal risks irrespective of who wins the upcoming presidential election.</li>
</ul>


With the Brazilian central bank approaching the end of its aggressive monetary tightening cycle, the rate curve has taken a unique shape that features a hump and a kink.
The hump should get more pronounced because the rate-cutting cycle should be deeper than currently priced because real rates are quite elevated and growth risks are high.
The kink should also get more prominent as the curve should steepen further out due to fiscal risks irrespective of who wins the upcoming presidential election.


The Hump and Kink in Brazil’s Yield Curve to Become More Pronounced

<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?

<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

<p>Among the themes in EM rates that we have highlighted in recent weeks are: EM rates have underperformed the US and, within EM, rates in Latin America have underperformed Asia. In this note, we look at the performances of rates in different countries adjusted by their respective betas that corroborate the earlier findings and help identify the outliers more clearly.</p><p>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.</p>

Among the themes in EM rates that we have highlighted in recent weeks are: EM rates have underperformed the US and, within EM, rates in Latin America have underperformed Asia. In this note, we look at the performances of rates in different countries adjusted by their respective betas that corroborate the earlier findings and help identify the outliers more clearly.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: Which Countries Are Outliers Within EM Rates This Year?

Israel

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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ILS 10Y (ISSW10 CURNCY)

The Hump and Kink in Brazil’s Yield Curve to Become More Pronounced

I expect the hump and kink in Brazil's rate curve to get more pronounced as a deeper rate-cutting cycle should get priced in and the curve should...

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

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

Rates 10y Dashboard: Which Countries Are Outliers Within EM Rates This Year?

Looking at the beta-adjusted performances of rates in EM countries corroborates our earlier findings that EM has lagged the US and LatAm rates have...

Gautam Jain, PhD, CFA

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52-week Range

Market Cap (USDm)

P/E

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