The US bond yields went up from 1.3 to 1.73 percent in a matter of three weeks. But now it has receded to 1.67 – 8 basis points (bps) lower from the recent highs. So, is the chaos or the volatility in the bond markets over? And how are financial flows into emerging markets (EMs) shaping up? Manpreet Gill, Head-FICC Investment Strategy of Standard Chartered Private Bank answered these questions.

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“We have seen a little bit of pullback and it has been nice. But arguably you could attribute some of that to positioning having become lopsided but there are still some fundamental questions ahead of us on the inflation side,” he said.

Gill believes there is no reason for Powell to react to rising bond yields if the economy is doing okay.

“What still stands out to us is Jerome Powell, unlike the ECB, did not try to lean strongly against the rising bond yields. There is no reason for them to do so if the economy is doing okay, corporate bond markets are doing okay, and the dollar hasn’t surged in a very big way. The bulk of the move might very well be behind us but if you are looking at inflation and growth creeping back towards the 2 percent range, that is where – because the yields around where they are – potentially another 10-50 bps higher doesn’t look unreasonable. It is quite possible we will see markets test how far the Fed is willing to allow this to go,” he stated.

Vaccinations against COVID-19 are accelerating rapidly in the US, leading to increased inflation expectations, he said.

In terms of flows, he pointed out, “Flows have been quite tentative day-to-day and week-to-week basis, depending on the US dollar because going into the year that is one key assumption across the market that we are going to get a weaker dollar and that is usually great for EMs." There is some sensitivity on that front, however, it is arguably lesser than what one would expect in equity and bond markets.

Considering the bigger context, Gill believes the dollar rebound has been quite small.

For entire discussion, watch the video.

(Edited by : Yashi Gupta)

First Published:Mar 23, 2021 3:01 PM IST