US yields are up by around 70bps since our last bond yields report in December with large-scale stimulus, vaccine rollout and re-opening the main drivers. US real yields are up, but remain negative, and the S&P has gained another 13%. Little has changed in our overall ranking of bond yields although nearly all countries have seen rates rise as inflation concerns heat up. South Africa and China are the main exceptions reflecting ongoing currency strength and more contained domestic price pressures generally.
Turkey remains the highest yielder in our sample. With 200bps in rate hikes earlier this year and renewed concerns about institutional credibility yields are up sharply versus December. The country also has by far the highest inflation with real rates currently around zero.
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Summary
- US yields increased sharply through Q1 pushing rates higher globally. But in most countries spreads over USTs have narrowed.
- Rate hikes in part of EM have pushed yields sharply higher in a few countries. Turkey remains the highest yielder in our sample and now with an even wider gap.
- China and South Africa have seen yields drop alongside FX appreciation.
- Euro-area yields have also increased despite the ECB’s pledge for significant PEPP purchases.
Market Implications
- EM yield pickup remains attractive and debt profiles manageable at now higher rates. But currency stability remains the biggest risks for the high yielders.
US yields are up by around 70bps since our last bond yields report in December with large-scale stimulus, vaccine rollout and re-opening the main drivers. US real yields are up, but remain negative, and the S&P has gained another 13%. Little has changed in our overall ranking of bond yields although nearly all countries have seen rates rise as inflation concerns heat up. South Africa and China are the main exceptions reflecting ongoing currency strength and more contained domestic price pressures generally.
Turkey remains the highest yielder in our sample. With 200bps in rate hikes earlier this year and renewed concerns about institutional credibility yields are up sharply versus December. The country also has by far the highest inflation with real rates currently around zero.
Elsewhere in EM, rate hikes in Brazil and Russia have pushed yields higher with Brazil overtaking South Africa as the second highest yielder. Indian yields are broadly unchanged around 6% as the launch of an official QE programme by the RBI has offset inflation worries from the latest state-level COVID lockdowns. Across Central Europe, yields are around 60bps higher on the back of accelerating inflation. On an HICP basis Poland has the highest inflation in the EU at 4.4%, Hungary the second highest at 3.9% and Czech the fifth highest at 2.3% (March data).
Chinese yields are down about 20bps since early December, versus about 10bps for South Africa. Concerns over the strength of China’s domestic momentum, portfolio inflows on the back of forthcoming WIGB inclusion and the still-strong exports and CNY performance are all playing a role.
We wrote last time that the rise in US yields did not look too much of a concern for EM given the low level of US yields. The search for yields remains firmly in favour of EM and so far the move higher in yields has been fairly orderly. EM equity markets have also continue to record inflows, barring a bout of tech-related weakness. Whether or not EM bonds look attractive will, however, depend on currency stability, particularly for TRY and BRL.
Away from EM, Euro-area yields have also moved higher with deflation now firmly behind us (April flash CPI at 1.6%). Stepped up ECB PEPP purchases have offset some of the gain but bunds are still around 40bps higher than December levels and French yields around 50bps higher. At -0.2% 10-year bunds continue to trade with a negative yield.