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Even though it was widely expected, QE extension announcement pushed peripheral bond yields much lower

31 October 2017

The week was definitely not favorable for the fund as emerging markets currencies are suffering a lot and the ECB delivered a dovish message.

Regarding emerging market currencies, a few reasons explain the pressures currently faced. In general, US government bond yields are rising because of strong economic data but also because of the next Fed chairman nomination that is still uncertain, leading to a strong USD. On top of that, some of our positions are impacted by specific issues (NAFTA agreement for the Mexican Peso, diplomatic tensions around the Turkish Lira). Where do we stand? 

  • 10-year US government bond yields are at 2.47%, which is almost the highest for the year. At this level there is little room for further yield increase, especially with European and Canadian central banks delivering dovish messages last week 

  • Does it make sense for emerging market currencies to go down in this kind of environment? Absolutely – and specific risks are real. But the magnitude of the adjustment is already quite significant especially for countries with strong macroeconomic data 

Speaking of carry positions, we still believe that those assets are today quite appealing compared to other assets. It may take some time, but we do think that the “carry trade” will come back at some point in the markets, and those assets should be well positioned.

The ECB held its committee last week: 9-month extension (until sept 2018) and reduction to €30bn from €60bn. It is broadly in line with the market’s expectations in general but the reaction has been rather cautious with a global decrease of government bond yields (especially Italy and Spain) and a decrease of the euro from $1.18 to $1.16. The latter had a very positive impact on euro equities, up by more than 2%. 

According to an article published last week by Politico, Yellen and Warsh seem to be out of the race for the Fed chairman nomination with now only Powell and Taylor remaining. 2018 budget has also been adopted in the US, that was a must before potential tax reform. 

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