Toxic: Global Bond Selloff, Rising Yields And China’s Fading Credit Impulse

In what is now looking like only a brief respite early last week, US yields hit a new year-to-date high at 1.7437%. Real yields drive the rise in nominal yields this week, with 10y real yields about 10bp higher from Monday’s lows to -0.63%.

For EM FX, rising real yields in an environment of a fading credit impulse in China are a challenging combination.

In G10 FX, and are well supported, reflecting the underperformance of their fixed income markets vis-à-vis USTs and optimistic global growth narrative. For , though, wider US-Japan rate differentials—both nominal and real—point to further upside, with the pair approaching 110.

Strong China credit growth in recent months has had positive spillover effects on commodity prices and, in turn, EM commodity exporters. That was encouraging much-improved EM current account balances and providing an essential buffer against rising UST yields. 

However, China’s credit impulse is likely to slow through 2021. Declines in the credit impulse in 2011-12 and 2014-15 were not accompanied by rapidly-improving activity and fiscal stimulus in the G10 economies. So rising global yields in an environment of fading credit impulse in China is a toxic combination for EM assets.

The other side of the coin

US President Joseph Biden’s comments urging the continuation of mask mandates along with the US CDC Director’s warning on a fourth wave threaten to bring some of the recent weeks’ European lockdown anxiety state-side, which is another speed bump on the seemingly never-ending carousel of COVID risk.

Still, I think this is a bit of a see-through for the market. Perhaps I do not see the reality for North America mask angst. Living in Asia, where masking is standard practice, I don’t get what is so innocuous about wearing a mask So maybe my  look through view is not valid. 

And yet 

The market got burned playing for a more dovish Fed in 2020 and is now afraid of making the same mistake twice. Instead, much of the market might now be making the opposite mistake. While the Fed may end up hiking in 2023 in response to accelerating , I think the market’s view of the Fed reaction function for 2021 is too hawkish. 37% of respondents expect a taper announcement this year.

The point of AIT is not to add more accommodation during the recession or early in the recovery; the point is to policy normalize more slowly to the rebound. So while the market was expecting YCC or WAM late last year on the back of AIT—that was wrong. What the market should expect from AIT is not more gas, just less brake.

In contrast, a good portion of the market expects an orthodox Fed that still believes in the Philips Curve, and that will blink at the first sign of inflation.

I think we will soon begin to see more folks move to Team Transitory for now as they are starting to believe the reopening hype is way beyond reality at this point.

I suspect investors need a little more proof in the economic pudding before taking the next leap of faith. And an old foe becomes the paradox for risk.

It always seems like a struggle to break higher ground, and given the heavy economic calendar, I suspect investors need a little more “proof is in the economic pudding” before taking the next leap of faith.

With a lot of growing optimism in the price, economic data will need to do much heavy lifting in the future. And as we all know, nothing is a sure bet in the markets, especially when it comes to banking on lofty economic data expectations. 

And while US might be this week’s show stopper event, it’s hardly the only thing on traders’ radar.

Tensions between the West and China are running exceptionally hot, and while that’s nothing new, the Xinjiang issue appears to have reached a boiling point.

Sure, the FOMC’s dovish plumage continues to offer up the ultimate safety blanket; however, in itself, It’s no longer enough of a force to take risk higher, especially with the market consistently on the ready to challenge that dovish narrative, primarily through the more robust US data and inflation channel.

And that is where the old foe (inflation) once again becomes the paradox of risk 

Most risk in the market is in two places, vol and short-dated US Treasuries.

Vol: The direction of the is the lowest conviction trade out there. Most buy into the deficits/weakness argument, but it hasn’t worked. The economic strength argument should work, but history is against it. Although my view is that the dollar strengthens, whichever version of events is proving correct, can’t stay here.

By association, a more robust/weaker dollar has implications for all other assets. Vol is too low across the board. The moment the market decides on USD, there’ll need to be wholesale repricing across all markets.

US Treasuries: – & Treasuries, and particularly real rates, are in a precarious position. They have been well behaved and buying into the Fed story of lower/longer, but the Fed is “state-contingent.”

Strong payrolls could be a bit back bitter for stocks if the solid economic impulse drives US short-dated rates higher, tightening financial conditions. 

If my version of events plays out and data dramatically improves, then the front end reprices higher, stocks move lower and EM tanks.


While we saw a more optimistic half glass full approach to the New York session’s market, however, Asia opened up with a half glass empty approach. Local risk markets remain shaky on the back of US-China tension and the intense focus on continuing lockdowns— including Manila and Mumbai.

Improved service-sector activity will undoubtedly take a step back in one of the Asian oil import behemoths after Mumbai imposed a nighttime curfew.

The problem for a bullish view on oil: the market is super sensitive at the moment to any negative news. 

Higher UST Yields A Key Headwind

The year-to-date performance of the (-10.1%) and (-6.9%) are, however, in a similar ballpark to the (10.0%), suggesting that higher UST yields constitute a significant headwind for the asset class, despite much-improved current account balances versus 2013, 2016, and 2018.

In Asia, is one to watch. The INR’s regional outperformance this year amid solid equity inflows should be tested in the context of sharply rising COVID cases. And the much-improved service-sector activity could be walking back a few steps after Mumbai imposed a nighttime curfew.


Larger sell volumes on the auction with the quarter-end spot date on Monday, indicating potential producer and rebalancing interest. Bullion started the week on a sour note, touched its lowest level in two weeks with rising yields and USD, further weighing it down. A technical selloff got triggered after broke below $1,720-25, and sellers remained in control.

US equity gauges recovered nicely and proved resilient while OPEC+ likely toeing the supply line appears to be working in favor of oil today.


US equities were on the mend from springing a couple of small leaks after financial stocks came under pressure over concerns about potential losses from exposure to a liquidated investment fund. 

The bond market ignored the headline “hair on fire” melodrama as US10Y yields rose again, another 3bps to 1.71%. 

Oil prices gushed 1% even as the container ship that spent a week sideways in the Suez found itself back on the straight and narrow. With thanks, it seems, to a Super Moons tidal force. 

US equity gauges recovered nicely and proved resilient despite the quarter-end rebalancing. And as the contagion risk of the forced liquidation behind block sales in single name stocks lessens, investors feel less distracted, especially as the news quickly becomes tail end fodder with the market moving to bigger fish to fry.

And with the Fed dove’s plumage on constant display, perhaps it is a full-on pivot to hopefully much-improved data for March, which should start coming down the pipe this week, lighting the touch paper for a robust set of data into Q2. 

After a couple of quiet weeks on the US data front, fasten the seatbelt as things are sure to get a little more interesting in the coming days.

With spring in the air and President Joseph Biden expected to formally unveil a $3trn infrastructure plan Wednesday, just as the acceleration in activity from stimulus checks hitting doormats and feeding into the alt-data, it could provide a smoother and lengthier runway for risk to initially take flight. 

Spending the money is the easy part; the more difficult decision is how to pay for it. And with all roads intersecting at “tax hike junction,” Wall Street won’t be enamored, so all that is yummy around the infrastructure deal will need to be taken with a pinch of tax man salt. 

Oil Markets

Last week was characterized by wild intraday volatility in the crude price, with the entire week almost unchanged but close to a $5/bbl intra-week range. Well, it was no rest for the weary on Monday as the whipsaw was on full force again, illustrating how fragile and testy sentiment is. 

Still, into the Asia open, optimism for an extension of production curbs at this week’s OPEC+ appears to be working in favor of today’s price action. OPEC+, having maintained production cuts at higher prices last month, seems less likely to open the taps at current levels

Time to recheck the dipstick and top up on oil?

Oil is also powering ahead as energy traders look to President Biden to outline his infrastructure spending plans this week, which could supercharge an already accelerating US recovery.

Noisy markets not for the faint of heart

While there has been plenty of noise to keep the fast money moving, and undoubtedly not conditions for the faint of heart, Ever Given in the Suez was perhaps something of a volatility trigger, although the knock-on effect was relatively short-term and localized.

Maybe more in focus are continuing lockdowns—including Manila and likely Mumbai plus the upcoming OPEC+ meetings on 31-Mar/1-Apr where the pre-meeting assumptions are coalescing around producer caution in any decisions around bringing back production to this fragile market—albeit the continued rise in the frac count and higher US should be serving as a warning to them in terms of price/market share.


I suspect markets will continue a two-pronged trade view in FX: to stay long USD vs. vulnerable low-yielders where a dovish central bank is likely to keep rate divergence in play; and to stay positioned for the global recovery via only selective high beta FX funded out of EUR, or JPY and avoiding the US dollar with the US yields set to move higher. 

Higher yields and a stronger US dollar are entirely reasonable assumptions—the US economy is well on its way to digging itself out of the pandemic. Massive fiscal stimulus is now literally hitting doormats, and the signs are President Biden has an enormous infrastructure plan for later this year. Why wouldn’t yields rise? 

The Euro 

EUR/USD is still wilting around its lows for the year so far, with COVID-19 headlines and EU recovery fund concerns in play. Germany’s constitutional court has blocked Germany’s ratification of the Next Generation EU fund until it has considered a challenge to its constitutional legality. And has moved to a fresh YTD low this morning, echoing the continued divergence in COVID-19 related headlines.

The Malaysian Ringgit

The improved off monthly lows after the government released better than expected trade data. With oil showing some signs of recovering from the EU lockdowns, it’s adding a modicum of support.

Bonds have sold off sharply. While stretched absolute yields could offer value to select “real” local money investors with lower liability hurdles, I still think foreign investors will remain wary as the easing cycle is over and should not be considered a reliable source of inflows. 

I don’t have any news on the FTSE World Government Bond Index review, which will decide whether Malaysia will remain on the watch list. If MGS’s stay on the list, it shouldn’t rock the boat, but it will likely help the MYR a bit if removed. However, with the market turning into a better seller of bonds, any MYR bounce could be fleeting.

The Thai Bhat 

remains bid with foreign investors reducing holdings of local bonds and stocks despite the effort to rekindle reopening plans by reducing days spent under quarantine requirements in some tourist provinces. Still, investors remain worried that another holiday season could turn to dust if the government doesn’t ease the tight and confusing COE (certificate or entry) requirements. 

Gold Markets

Of course, higher US yields are providing the sour eye-candy. Gold suffered the double whammy indignity amid quarter-end reallocation flows starting to come to market. As US cash equities open, gold broke below the previous lows around $1720 amid quarter-end reallocation hitting the market. The following support is around $1700, then $1680.

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