Fixed Income: "Panoramic Weekly: Emerging Markets win US mid-terms"
From Bond Vigilantes:
Emerging Market (EM) bonds and currencies were one of the main
beneficiaries of Tuesday’s US mid-term elections, which resulted in a
split Congress, with the Democrats controlling the House of
Representatives and the Republicans, the Senate. This may refrain
President Trump from implementing further fiscal incentives, which
usually fuel the economy, lifting Treasury yields and the US dollar.
This is good news for EMs, which have dollar-denominated debt and use
Treasuries as their base risk-free rate (more below). The world
benchmark US Treasury 10-year yield eased to 3.19%, after rising above
3.2% on Friday, following the publication of the strongest wage-increase
data in almost one decade.
The risk-on mode lifted US High Yield (more below), while long-dated
bonds fared worst, including UK inflation-linked debt and gilts, down
2.3% and 1.3% respectively over the past five trading days.
Long-maturity Treasuries lost 1.2% over the same period. Global stock
markets reacted positively to the US election results on hopes that
moderately-rising Treasury yields and a potential toning down of the
US-China trade war may better support the world economy.
Heading up:
Emerging Markets – dollar relief: EM currencies
surged in the aftermath of the US mid-terms, especially those countries
that are more exposed to a higher dollar. As seen on the chart,
countries with the biggest Current Account deficits have seen their
currencies drop by the most so far this year, but some took a slight
relief after the election: the South African rand gained 1.3% on
Wednesday, while the Brazilian real strengthened by 0.5%, also driven by
unexpected soft inflation data. The Indonesian rupiah performed best,
up 1.5% in one day, as the country also posted third-quarter GDP growth
of 5.17%, above expectations, and said that its foreign reserves rose in
October for the first time this year. Despite the EM optimism, some
observers warned that the election outcome may not have much effect on
the ongoing trade tensions between the US and China, as these are
largely dependent on presidential views. Still, this week’s gains have
softened the year-to-date EM’s negative returns, as they have been
partially driven by a strong dollar: the JP Morgan GBI index of local
government bonds is up 1% in local currency terms in 2018, but down
almost 8% when translated into dollars. A softer greenback may make life
a bit easier for the asset class.
US High Yield – loving low rates: The risk premium
that investors pay to hold US HY over Treasuries dropped to 350 basis
points (bps), down from 380 bps only last week, on expectations that a
moderate rate environment will help contain defaults. This week’s gains
lifted US HY’s year-to-date return to 1.3%, widening the gap with its US
Investment Grade peers, which have lost investors 3.7% over the same
period, dragged down by ample supply and a deterioration in credit
quality. US HY is also outperforming European Investment Grade and HY,
underpinned by positive fundamentals such as lower net leverage and
higher interest coverage....
...
MUCH MORE
