Rising US bond yields kick EM in the shin

The job of a strategist is thankless, she is tasked with forecasting financial asset values in the future, when theory and, well, most of the practice tell us such forecasting is a Fool’s Errand.  That is because financial markets stage a “random walk”.  Nevertheless, these poor souls must try as best as they can, because theory also tells us without their forecasts, markets can’t make rational decisions.  Ohh, the cruel irony of falling on your own sword.

The year began with near consensus forecasts of EM and commodities to shine, wile US bond yields linger in a narrow range, as US dollar tanks. Well, year to date, strategist got the commodities rally, at least.


In  contrast to most forecasts, US long bond yields are marching upwards relentlessly, steadying the heavily-shorted Dollar Index. EM assets on the other hand are smarting from rising US bond yields.


The dollar’s down against other currencies, but not by a whole lot,” said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut. “I expect the dollar to be where it is now at the end of the year, and the main reason for that is while I see some signs of improvement in the economy, monetary policy is going to stay where it is.”


Bond strategists say the move in yields has opened the door for a higher move, and a next logical target for the 10-year is 1.5%. The yield is unlikely to go much higher in the near term unless inflation picks up or there is a signal from the Fed that it is ready to tighten policy, which is highly improbable, according to CNBC.com. On Monday the 10 year bond yield already traded up to 1.387% in Asia.


“I think it’s reflective of economic conditions, which is why other financial assets, like equities, aren’t taking it too badly,” said Jim Caron, head of global macro strategy at Morgan Stanley Investment Management.


“The thing is you ain’t seen nothing yet,” he said. “That’s with a $600 stimulus check. What about with a $1,400 stimulus check in hand?”


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This is a good question, because February preliminary US composite PMI attests to severe price pressures, being reflected to the consumer.

“This one-two punch is occurring,” Marc Bellemare, professor of applied economics at the University of Minnesota, told Yahoo Money, “where a lot of people are losing their main source of livelihood and then, at the same time, food is getting more expensive.”


The consumer price index (CPI) for food increased by 0.4% in December 2020 from the previous month, with food prices ending the year 3.9% higher than 2019, according to recent data from the Department of Agriculture and the Bureau of Labor Statistics. The year-over-year jump outpaced the 20-year average of 2% and the increases seen in 2018 (0.4%) and 2019 (0.9%).


Such trifling increases may not worry most families unduly, but in terms of forming long-term inflation expectations, which drives the all-important break-even yield, rising food and oil prices are as potent motive.


For Developing nations, rising US bond yields, energy and food prices have implications beyond assets prices.  They narrow the room for monetary easing, as well as reducing household budgets devoted to discretionary consumption.


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Rising U.S. Treasury yields are starting to concentrate minds in the world of emerging markets.


Developing-nation local-currency notes had their worst week since September in the five days through Friday, while dollar debt declined by the most since January as surging inflation expectations fueled a rout in Treasuries. The selloff in the world’s largest bond market also sent implied volatility for currencies and stocks to the biggest weekly jump of 2021, comments Bloomberg.


A Bloomberg study in January found all developing-world currencies typically sell off when yields jump at a rate greater than about 25 basis points per month. The 10-year Treasury yield has risen by 27 basis points this month through Friday.


“Our optimistic emerging-market currency outlook is not without risks of setbacks along the way,” Ehsan Khoman, the Dubai-based head of emerging-market research in Europe, the Middle East and Africa at MUFG Bank. “By and large, we believe relative cyclical outperformance and attractive yields on offer continue to favor stronger EM currencies as Covid-19 ebbs.”



Adverse external conditions are yet to topple Turkish Lira, despite the country’s well-known economic fragilities, with dollar-TL starting the day at 6.96-97.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.