SA and South Korean bonds most vulnerable to US yield shock

Could 2020 finally be the year that the Treasury bears are vindicated?

If so, emerging-markets traders may find that Thai, South African and South Korean bonds are the most vulnerable, while those in India and Russia would be the least responsive, a Bloomberg analysis shows.

The study of 13 global emerging bond markets measuring their sensitivities to moves in the U.S. five-year yield showed those with highly consistent moves have economies more dependent on exports. By contrast, India and Russia — which rank at the bottom of the list — have a strong dependency on commodity prices and are less reliant on trade.

The analysis covers seven periods from mid-2011 when the five-year Treasury yield moved more than 35 basis points over a two-week period.

Below is a table showing the size and consistency of how each country’s bonds responded on average.

Source: Bloomberg

Key insights

• Thai yields have seen the most consistent moves in response to a spike in 5-year Treasury yields, rising by an average 14 basis points versus an average 39 basis point move in the U.S. rate — a ratio of about 0.36, reflecting Thailand’s out sized dependency on trade
• South African yields have seen highly consistent moves, rising by an average 0.7 basis points per 1 basis point move in Treasuries, likely reflecting the elevated foreign shareholding in the nation’s bonds and the rand’s freely-traded position
• Similarly, South Korean yields have moved consistently in tandem with U.S. yields, rising by an average 0.47 basis points, underscoring its open capital accounts and strong trade dependency
• India’s yields are the least responsive, rising by an average of only 0.12 basis points, due to its relatively lower trade dependence and foreign bond holdings
• Russia’s yields fell by 0.49 basis points, though this is distorted by an out-sized drop in the February 2015 period as the central bank cut rates by 200 basis points at a single meeting held on Feb. 2.
  • If the outlier is discounted, Russia’s directional yield move is similar to U.S. yields while the responsiveness is closer to that of India’s
• With growing signs the U.S. economy may be on the mend, Treasury yields are at risk of a shock move higher. Still, their 2020 trajectory remains unclear for economists with end-year estimates for the 10-year yield ranging from 1% to 2.5%
• The most recent spike in U.S. yields occurred during the Sept. 3 – Sept. 16 period as investors priced-in a more hawkish Federal Reserve outlook, with fed fund futures now seeing the next rate cut in the third quarter of 2020
  • During this period — the only one where EM bonds diverged in the study — yields in Indonesia, Russia, Turkey and Brazil fell even as U.S. ones rose. Central banks in those countries cut policy rates in September and October and there was also a surge in U.S.-China trade optimism

NOTE: Marcus Wong is an EM macro strategist, who writes for Bloomberg. The observations he makes are his own and not intended as investment advice