US and Germany saw a 7-months yield high on Wednesday raising concerns for markets all over the world. Rise in US bond yields by 9 basis points is largely due to higher valuations, Rohit Arora, EM Asia Interest Rates Strategist at Barclays Capital told CNBC-TV18.
Rise in US sell-offs can majorly impact fixed income markets in emerging and developed market if it continues for another three weeks, he said.
Emerging markets saw large sell-offs in the last two days, especially countries like Singapore, Thailand and Indonesia, said Arora.
Adding, he said, “India also saw sell-offs, but those were due to its own monetary policy than the US market.”
Below is the transcript of Rohit Arora's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: We saw this 9 basis points (bps) rise in US bond yields, 2.38 at one point in time and German bunds as well. Should we worry about further impact on emerging markets both bonds and equities?
A: If we look at recent sell off in US treasuries or developed market yields, there are three reasons behind it. Firstly, the valuations were getting into richer territory and as a result, any turnaround in data had to increase volatility. So, that has been happening since mid-April and has been more or less behind the sell-off. In fact, if you look at the sell-off, it has been mostly driven by real yields.
Secondly it is because the volatility is higher and that combined with banking regulations is making the stop losses exaggerated.
Thirdly, the recent Central Bank speaks, be it Federal Reserve or European Central Bank (ECB), has been more or less dovish than what the markets were expecting. So, more or less bond yields are behind the recent sell off and given the sharp rise and increased volatility, we have to be watching it more closely and it can impact any fixed income market in the world.
What does it mean to the emerging market fixed income, given that it is more or less resulting in volatility shocks, surely the EM fixed income market will also be impacted. Today as well as yesterday, we have seen similar to larger sell-offs in most of the regional markets be it Singapore, be it Thailand or be it Indonesia. India of course is seeing sell off but again it is mostly driven by its own monetary policy concerns than US at this stage.
Sonia: What does all of this mean for emerging market equities like India?
A: Equities, like what we saw overnight was – there has been kind of a divergence in different assets that we see. The volatility in fixed income market has certainly increased but at this stage, it is a bit early to say what it would mean. But yes, if it continues for other three weeks and we see moves like taper tantrums, we could see some kind of impact on equities as well.
Latha: Would you attribute even the recent sell off that we have seen in most emerging markets over the last week or so to the rise in these yields?
A: Not necessarily. Somewhat sell off, we have seen in developed markets more or less to kind of mix data. what we have seen in a few emerging markets is more or less driven by the decline in commodity prices and because a lot of emerging markets are linked to commodities, the weakness over there has been reflection of the same and elsewhere in a few regional markets in Asia. I would say it is more driven by idiosyncratic moves. For example, in India, it was more or less driven by Reserve Bank of India (RBI) policy and its implications on banking stocks.
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