EM don’t have reserve currency status, unlike DM they never benefited from zero rates

• Over the past 12 months, the World average 3mth gov’t bond rate rose from 1.7% to 5.0%
• That 3.3ppts rise highlights the rising interest rate environment we have been living through
• In the Developed markets 3mth rates rose from zero 12 months ago, before the Ukraine war started, to the current 3.3%
• Despite this strong rise, DM’s interest rates remained at a 1.7ppt discount to the world average
• Meaning EMs were rising equally fast
• So, let’s look at EMs
• Over the past year, 3mth rates rose from an already high 4.3% to 7.4%, up 3.1ppts, double the rate of DMs and a 2.4ppt premium to the World average

DM 10yr yield starting to fall, anticipating lower inflation; EM flat for a year

• World LT interest rates rose from 2.8% 12 months ago to 4% today, a 1.2ppts rise
• Developed markets saw a YoY interest rate rise from 1.2% to 2.9%, up 1.7ppts rise
• DM’s discount to the world interest rates rose from negative 1.6ppts to negative 1.1ppts
• EM had a small rise from 5.1% to 5.6% YoY, a small 0.5ppts rise on an already high rate
• EM premium to world fell from 2.4ppts to 1.6ppts

Key points & the bottom line

• EM never had reserve currency status, so unlike DM, they never benefited from zero rates
• Since rates have always been higher, borrowers in EMs have not had the same incentive to borrow as in the DMs; therefore, the balance sheet quality is strong

US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates

• DM Americas rose from 0.2% to 4.7%, up 4.5ppts
• Its relative discount to the world narrowed from negative 1.5ppts to negative 0.3ppts

US led the rise, DM Europe is catching up, Japan now at a deep discount to world rates

• DM Europe rose from negative 0.4% to 2.5%, up 2.9ppts
• Its relative discount to the world widened from negative 2.1ppts to negative 2.5ppts
• DM Pacific rose from 0% to 1.1%
• Its relative discount widened from negative 1.7ppts to negative 3.9ppts

DM Europe LT rates rose most aggressively from near zero, preventing a currency collapse

• DM Americas rose from 1.8% to 3.4%, up 1.7ppts; rel. discount narrowed from -1% to -0.6%
• But LT rates fell slightly in January showing the market believes inflation has been tamed
• DM Europe rose from 0.6% to 2.8%, up 2.2ppts; rel. discount narrowed from -2.1% to -1.2%
• DM Pacific rose from 0.7% to 1.4%, 0.7ppts; rel. discount widened from -2% to -2.6%

Key points & the bottom line

• US led the rise, DM Europe is catching up, DM Pacific is now at a deep discount to world rates
• DM Europe LT rates rose most aggressively from near zero, preventing a currency collapse
• Importantly, LT rates fell slightly in January showing the market believes inflation has been tamed

Click here to get the PDF with all charts and graphs

 

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