Monthly Archives: June 2013

Emerging Market Bond Conundrum

So, for 200 years, EM bonds have been hit when DM yields rise. It’s not new.

What is new then? As EM to EM business has surged, and EM savings have boomed, so the ownership structure has changed.

Now EM investors constitute the core of EM bondholders. So, the sell off makes less sense, it is being driven by the marginal holders.

In short, there is already value in EM bonds.

The "Bernank" Bashing

There’s been a healthy sell-off in equities, commodities and gold. USD has bounced back against most other currency pairs. Here are my thoughts;
It is important to remember that the Fed is not a very good market forecaster, so the expectation now reflected in market prices, of the Fed reducing QE in the coming months, is still very uncertain. In this context, Bill Gross is still calling for year-end US 10yr sub 2.0% (now 2.4%).
Ignoring this uncertainty, Bernanke sent a very strong message to the market. He was very clear about when the central bank expects QE to actually end. Although he also acknowledged aggressively that the FOMC Target (Interest) Rate is unlikely to move for sometime, even if the unemployment rate is doing well. This is obviously an effort to prevent an excessive collapse in long-term bond prices.

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This Week In The Market

The S&P 500 lost 1.1% last week, and Emerging Markets lost 1.7%, whilst the EuroStoxx 50 was flat (+0.2%). Russia had a difficult week, losing 2.2% as EMs succumbed to sharply shifting capital flows. The US 10 year treasury yield rose by 12 basis points, and at one stage crossed the 2.20% line. What is going on, and what can we expect for the coming week?
The answer to the former question is that markets are reviewing expectations about monetary stimulus in the US. This should not be a surprise, we’ve been flagging for months that the US economy is doing relatively well, and recent minutes from the FOMC reflect a growing interest to start reducing monetary expansion, the precursor to tightening policy.
The behaviour of Emerging Markets, not least Russia, is a natural consequence of this circumstance. Improved yields in the US will lure money from perceived riskier environments. The upshot is “unfair” on emerging market assets, which ultimately stand to benefit from improved US growth. But it also provides attractive entry opportunities. The relative stability of European assets reflects the perception that interest rates in the single currency area are on a significantly different path at this time.
The coming week brings a veritable flood of important economic data. The most eagerly awaited is Friday’s jobs number, but we will also get ISM data, US trade data, European retail sales and GDP, BoE and ECB rate decisions, German exports and Chinese consumption data. The ebb and flow of this data will drive markets, but beyond this we should consider that the volatility that proceeds monetary tightening tends to provide a good opportunity for investment.