MyStratWeekly – March 12th 2024

Topic of the week: EM Investment Grade sovereign hard currency debt has earned its reputation!

• The EMBIGD Investment Grade index spread is now aligned with that of US IG corporates;
• This reflects the significant improvement in macroeconomic fundam-entals, including low debt levels combined with a good quality sovereign rating;
• This improvement also explains the resilience of the asset class in an environment of high volatility in US sovereign bond markets;
• Central banks that were the first to raise policy rates are now reaping the rewards;
• Decoupling of EM IG sovereign hard currency debt seems to be a given.

Market review: The confidence game

• The ECB lowers its 2024 inflation forecast;
• Powell’s confidence on the disinflation process;
• Italian BTP spreads shrinking to 130 bp;
• Equities and CDS react positively to central banks’ messages.

Axel Botte's and Zouhoure Bousbih's podcast

• Topic of the week: US Employment Report and Inflation and ECB;
• Theme: IG emerging sovereign debt in dollar – a 100% mature asset class!

Chart of the week

The Bloomberg cumulative FX Carry-Trade index for G-10 currencies reached an all-time high. The necessary condition for carry-trade strateg¬ies to work is the absence of volatility. However, it has fallen significantly since October 2023.

The yen has been used primarily as a funding currency for these strategies. Market operators borrow the Japanese currency to buy dollar. The appreciation of the greenback over the period increases the gains of the carry-trade strategy.