Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

Digging deeper into the underperformance of EM rates to the US, we find that within EM, the regional differentiation has been quite significant. Specifically, while rates in Latin America have underperformed the rally in the US significantly, rates in Asia have lagged by much less. This differentiation argues for relative-value trades between rates in LatAm and Asia as well as within countries in Asia.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.

Digging deeper into the underperformance of EM rates to the US, we find that within EM, the regional differentiation has been quite significant. Specifically, while rates in Latin America have underperformed the rally in the US significantly, rates in Asia have lagged by much less. This differentiation argues for relative-value trades between rates in LatAm and Asia as well as within countries in Asia.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: The Gap Between Rates in LatAm and Asia Grows

EM rates continue to lag the rally in US rates, resulting in a drop in the correlation between the two. We also find that the cross-correlations between EM rates have dropped in contrast with EM currencies. A direct implication of this is, unlike EM currencies, there are greater relative-value opportunities within the EM rates universe.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.

EM rates continue to lag the rally in US rates, resulting in a drop in the correlation between the two. We also find that the cross-correlations between EM rates have dropped in contrast with EM currencies. A direct implication of this is, unlike EM currencies, there are greater relative-value opportunities within the EM rates universe.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: Cross-Correlations Between EM Rates Drop

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

Long-end rates in EM have not kept up with the rally in US rates, with the notable exception of Turkey. The rally in Turkish rates has been impressive especially when factoring in the recent spike in inflation. Nevertheless, Turkish rates should continue to outperform as we expect the central bank to ease later this year and the macroeconomic and technical backdrops have improved. However, any position in Turkey is inherently risky because of political meddling in monetary policymaking.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.

Long-end rates in EM have not kept up with the rally in US rates, with the notable exception of Turkey. The rally in Turkish rates has been impressive especially when factoring in the recent spike in inflation. Nevertheless, Turkish rates should continue to outperform as we expect the central bank to ease later this year and the macroeconomic and technical backdrops have improved. However, any position in Turkey is inherently risky because of political meddling in monetary policymaking.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: Are Rates in Turkey Due for a Reprieve?

Thailand

A vanilla interest rate swap is 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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THB 10Y (TBSWO10 CURNCY)

Rates 10y Dashboard: The Gap Between Rates in LatAm and Asia Grows

As EM rates have underperformed the rally in the US, we find that there has been significant regional differentiation within EM, arguing for inter...

Gautam Jain, PhD, CFA

Rates 10y Dashboard: Cross-Correlations Between EM Rates Drop

We find that the cross-correlations between EM rates have dropped. A direct implication of this is, unlike EM currencies, there are greater...

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

Rates 10y Dashboard: Are Rates in Turkey Due for a Reprieve?

Long-end rates in Turkey have rallied despite the recent spike in inflation. Despite risks, we expect the outperformance to continue on the back of...

Gautam Jain, PhD, CFA

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