Fixed Income

EMD Relative weekly notes

Week Ending July 20, 2018

07/23/2018

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

This week the president returned to suggesting that the US dollar was too strong, that rising rates were a bad thing, and that he was ready to continue to place tariffs on significant portions of imports from China.

Markets did not seem to notice, leading us to ponder the issue of volatility. We draw your attention to the chart below that shows how remarkably low volatility has been in US bonds and equities throughout this year. Above those we have placed charts showing aggregate credit default swap levels for a broad swath of EM countries, measuring perceived default risk, plus EM currency volatility. Both of these latter measures have been consistently at elevated levels this year.


Source: Bloomberg; as of July 20, 2018. CDS spreads are measured on Brazil, Mexico, Turkey, South Africa, Colombia, Russia, Hungary, and Indonesia. UST volatility is based upon 2, 5, 10, and 30-year options.

From our standpoint, market volatility has been particularly, disproportionately centered on EM assets this year. The current decline in both EM perceived default risk and FX volatility suggests that this asset class may have weathered the worst, at least for now.

Alternatively, if the various geopolitical issues capturing headlines translate into—finally—developed market volatility, emerging market assets would have a higher probability of weathering the storm better than the somnolent US markets.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.