26 Mar 2015
Stabilising EM growth and a reprieve from the Fed should support EM bonds – GS
FXStreet (Barcelona) - Caesar Maasry, EM Strategist at Goldman Sachs, argues that with Fed expected to hike rates in September, and EM growth stabilising, EM bonds offers a better way to position than EM FX.
Key Quotes
“In addition to a potential stabilisation in Chinese and EM growth, the dovish outcome of last week’s FOMC meeting creates a window with a more supportive backdrop for EM assets.”
“The overall message delivered by the Fed in last week’s FOMC was dovish. The updated economic projections led to a decline in the Fed’s ‘dots’ (or expected path of policy normalisation) closer to the market’s expectations, which were less hawkish to start with.”
“They are now in line with our view of a September hike, which is less aggressive than the prospect of a June hike that was expected in certain quarters of the market.”
“At the same time, Bunds continue to rally, anchoring global fixed income and, by extension, EM bonds. Overall, selling pressures on account of rising G3 yields have to a significant extent reversed.”
“We think EM bonds may offer a better way to position for this tactical relief than EM FX. If the rally in G3 (and in particular US bonds) continues and reverses the increase in yields witnessed over the past month, it would clearly be supportive of EM bond yields.”
“More importantly, if the Fed’s ‘dot plot’ continues to move towards our expectation of a later rate hike and the market’s view of a shallower path of rate hikes, then there would be room for the EM bond rally to be sustained for some time.”
Key Quotes
“In addition to a potential stabilisation in Chinese and EM growth, the dovish outcome of last week’s FOMC meeting creates a window with a more supportive backdrop for EM assets.”
“The overall message delivered by the Fed in last week’s FOMC was dovish. The updated economic projections led to a decline in the Fed’s ‘dots’ (or expected path of policy normalisation) closer to the market’s expectations, which were less hawkish to start with.”
“They are now in line with our view of a September hike, which is less aggressive than the prospect of a June hike that was expected in certain quarters of the market.”
“At the same time, Bunds continue to rally, anchoring global fixed income and, by extension, EM bonds. Overall, selling pressures on account of rising G3 yields have to a significant extent reversed.”
“We think EM bonds may offer a better way to position for this tactical relief than EM FX. If the rally in G3 (and in particular US bonds) continues and reverses the increase in yields witnessed over the past month, it would clearly be supportive of EM bond yields.”
“More importantly, if the Fed’s ‘dot plot’ continues to move towards our expectation of a later rate hike and the market’s view of a shallower path of rate hikes, then there would be room for the EM bond rally to be sustained for some time.”