The Morning Standard:EM rates curve has divergent shapes

Emerging markets faced significant selling pressure in November 2016, but most have recovered modestly in early January. Foreign buying of EM local currency (LCY) debt improved on a pullback in USD strengthening, as the content of President-elect Trump’s press conference on 11 January was not substantial enough to sustain USD bullishness. Following the US Treasury (UST) yield highs after the 14 December Fed hike, the UST market has seen a short squeeze, supported by the lack of economic policy plans from the Trump transition team. Hence, the 2Y/10Y curve has bull flattened and the 10Y/30Y has re-steepened slightly.

Although UST steepening pressure on EM rates eased significantly, we think some curves remained steep on local factors (Figure 1). For Indonesia, the reduction in duration and domestic liquidity has eased in January 2017, pushing short-end yields lower amid reduced buying of long-end bonds. The 2Y/10Y yield spread for Malaysia government securities (MGS) is flat. However, the 10Y/15Y MGS yield spread has risen to 46bps from 30bps in December 2016. As we believe that onshore long-term investor demand for MGS remains solid, we may see the MGS curve flatten tactically.

For Thailand, the THB 2Y/10Y yield curve steepened the most in Asia as heavy supply of longer-tenor THB bonds in Q4-0217 (to fund long-term infrastructure projects) met with muted local demand amid rising UST yields. For Korea, KRW 2Y/10Y steepening was on the back of unwinding of heavy local long positioning in KTBs and foreign investors’ selling of 10Y KTB futures.

Near-term, we believe EM rates will remain volatile as foreign sentiment towards emerging markets is highly sensitive to surprises in Trump’s policy agenda. This will likely put pressure on foreign buying of LCY debt.