BondWorld : EM Bonds attractive after FED and China interventions. Markets reacted well to the Federal Reserve’s tapering announcement.
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Andrea De Gaetano – Independent Analyst
BondWorld – All rights reserved
Inflation, which rose to its highest level since December 1990, pushed real bond yields into more negative territory. This explains the euphoria in equity markets and the strong rebound in emerging market bonds. With current inflation levels at 6.2% in October over the previous 12 months, the Fed’s statements sound accommodative.
On 3 November, the Fed kept rates unchanged at 0-0.25% and will continue its bond purchases, albeit at a more moderate pace. Starting this month, the Fed will reduce its securities purchases by EUR 15 billion a month, from the current EUR 120 billion (EUR 10 billion in Treasuries, EUR 5 billion in MBS). It should conclude tapering in July 2022.
Powell reassured that inflation was transitory, mainly due to bottlenecks in supply chains. As the pandemic subsides, so will inflation, Powell said.
US Treasury yields fell after the Fed conference on 3 November. US GDP fell more than expected, to 2% in the third quarter from 6.7% in the previous quarter.
Bond yields declined despite record high inflation and producer prices, and employment rebounded: 531,000 new US nonfarm payroll jobs in October, better than expected (450,000). Unemployment fell to 4.6% from 4.8% in September. The yield on the 10-year US bond fell from 1.70% to 1.43%. The 30-year US bond fell from 2.16% on October 11 to 1.81%. The 2-year from 0.5% at the end of October to 0.4%.
The euphoria increased after the Bank of England’s decision to keep interest rates at 0.1%, displacing the market which had expected a 15 basis point rise.
Meanwhile, Asian emerging market bond yields rose from 3.4% in September to 4.70% today on Evergrande contagion fears over the property sector.
Elsewhere, yields rose after central banks raised interest rates, as in Russia from 4.25% in March 2021 to 7.50%. In Brazil, from 2% to 7.75%. In the Czech Republic, from 0.25% in March 2020 to 2.75% today, in Poland from 0.10% in May 2020 to 1.25% today.
In China, reports The Securities Times of Singapore, the authorities may loosen controls on bond issues by companies in the real estate sector to prevent their financing from deteriorating, favouring companies that use less leverage. This has triggered a strong rebound in the sector.
OPERATIONALLY AND IN CONCLUSION
The prospect of tapering by the Fed has strengthened the dollar, with the EUR/USD falling from the 1.1680 area to the 1.14 mark over the past two weeks.
This did not prevent a strong rebound in the local currency EM Bond sector, which had already discounted Fed tapering and a more laboured recovery from the Emerging Market pandemic.
Rate hikes by several central banks in EM countries with positive yield spreads, an accommodative Fed and ECB and rising inflation are opening up room for recovery in the EM bond sector in local currencies, one of the few areas where yields can be hedged against inflation.
Finally, emerging currencies, which are experiencing a more protracted recovery than developed countries, could recover ground as we emerge from the pandemic.
Conversely, strong currencies such as the euro and US dollar have already discounted the ongoing recovery and vaccination campaigns in their prices. They could weaken in the event of unforeseen events, such as a new economic slowdown.
US Retail Sales, GDP and European Inflation coming this week will give further indications as to which direction to take.
US CORPORATE BBB INDEX EFFECTIVE YIELD
ASIA EMERGING MARKET CORPORATE PLUS INDEX EFFECTIVE YIELD
EURO AREA YIELD CURVE
Quelle: BondWorld.ch
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