Morgan Stanley Fixed-Global EM Strategist Core Rates Bite-103317463-此为英文文档

Idea

August7,202310:34AMGMT

GlobalEMStrategist|Global

CoreRatesBite

RisingUSTyieldshavederailedEMfixedincomeandFXaftermonthsofresilience.WithUSTyieldsexpectedtocomelower,greaterstabilityforEMislikely.Yet,wecontinuetobelievethattheset-upisnobetterthanjustifyinganeutralstanceacrosstheassetclass.

FX&EMStrategy:WecontinuetobelievethatforEMlocalmarketstorally,theassetclasswillneedhelpfromUSTs.ThelowyieldsinEMlocalversusUSTscouldbeafactorinexplainingthelackofinflows.WealsocontinuetobelievethatAsiawilloutperformversusLatAm.

SovereignCreditStrategy:Thisweekwefocusonthecoreratessensitivityoftheassetclass.Giventhattherecentmovewasrealyield-driven,theweaknessiswarranted,butthebroad-basedunderperformanceinabear-steepeningepisodeislessusual.Whilethecurrentpullbackhasimprovedvaluationssomewhat,wekeepaneutralstanceonEMcredit,withthedislocationofHYtoEMFXandtherelativerichnessoftheA/BBB/BBcomplextoUScreditbothrisks.ThismeansthatwhilekeepingourpreferenceforHYoverIG,weadvocateforhigherselectiveness,preferringAngola,ElSalvador,Ghana,UkraineandZambiainthedistressedspaceandOman,DubaiandMexicoashigher-carryqualitycredits.Thesecreditsalsoofferbetter-valuedavenuestogainsomedurationexposurethantheAratedspace,inourview,wherevaluationsremainrichandcreditcurvesarealreadyflat.

LatAmMacroStrategy:Aswegointoamuch-neededbreakduringthelasttwoweeksofAugust,weleaveyouwithsomefoodforthoughtintotheautumn.Thethreetopicsonourmindare:1)ValuationsversusUSrates;2)ThepotentialimpactofElNiñoonmonetarypolicy;and3)PotentialcentralbankFXpoliciesintheautumn.WeprefertokeepourtradesonthelightersideandwewilllooktoreassessinearlySeptember.WestaylongUSD/CLPand2033NTN-BsandreceivedJan26DIsand2y1yTIIE.

AsiaMacroStrategy:Augusthistoricallyhasn'tbeenagoodmonthforAsianFX.

Thistimecouldbedifferent,withlowerUSTyields,anupsidesurpriseinChinapolicyandEMinvestorsholdingontocarrytrades.InFX,werecommendlongCNH/TWD,shortUSD/MYR,shortSGD/CNH,shortUSD/KRWandshortTWD/INR.Inrates,welikereceiving3-yearKRW,long10-yearINDOGBsandpay1-yearHKDversus1-yearUSD.

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NevilleZMandimika

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SimonWaever

Strategist

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IoanaZamfir

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EmmaCCerda

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2

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COP

MXN

PEN

CZK

HUF

PLN

RON

TRY

ZAR

IDR

MYR

PHP

THB

CNH

Idea

FX&EMStrategy:FlowsAreNotFlowingtoEM

JamesLord

InourlastGlobalEMStrategist,TrialbyMonetaryPolicy,wequestionedwhetherEMscoulddeliveronrate-cuttingcycleswhiletheFedandECBwerestillhikingrateswithoutcausingasell-offintheirFXandratesmarkets.

Twoweekslater,EMlocalmarketshavegivenupover1percentagepointoftheyear-to-datereturns,withcurrenciesinparticularsufferingsteeplosses(Exhibit1).TheFedhikesweren'tthemaindriverofthestrongerUSD,sincetheUSTcurvebear-steepenedsignificantly.YetthebroaderpointaboutEMscuttingratesamidarisingUSTyieldenvironmentstillstands.

Exhibit1:TotalreturnsinEMlocalmarketsinthepasttwoweeks

1%0%-1%-2%-3%-4%-5%

LatAm

CEEMEA

0.3%

Asia0.2%

-0.7%

-1.0%

-1.0%

-1.6%-1.5%

-1.8%

-1.3%

-1.9%

-2.5%

-2.8%-2.9%-2.7%

-3.6%

-4.0%

CarryDurationFXTotalReturn(inUSDterms)

Source:Bloomberg,MorganStanleyResearch

Thegive-backinreturnsforEMlocalcurrencyfundsishardlyfatalinanotherwiseverystrongyearfortheassetclass,butprovidessupportfortwooftheviewswehaverecentlybeenpromoting,andwhichweexpandonintheremainderofthissection:

•GainsinEMlocalbondsfromhereonwardswillrequiresomehelpfromUSyields

–i.e.,theywillneedtocomelowerinordertosustainanEMrally.

•Asialocalmarketsarelikelytooutperformfromhere,withmorestimulusmeasureslikelyannouncedinChinaandareboundinmanufacturingactivityintheregionalreadyunderway.

Onthefirstpoint,wecontinuetobelievethatEMlocalbondswillneedsomehelpfromabroaderrecoveryinfixedincome.TherelativevaluationbetweenEMlocalbondsandUSTsisonepointinsupportofthatview,withbothnominal(Exhibit2)andreal(Exhibit3)yielddifferentialsaroundrecordlows.

Ofcourse,comparingnominalyielddifferentialsisclosetomeaninglessfromavaluationperspective,giventhesignificantdeclineininflationandchangestothecountrycompositionoftheEMindexoverthelast15years.

Yet,itisstillimportanttobearinmind,asweexplainnext.

MorganStanleyResearch3

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

Aug-20

Aug-21

Aug-22

Aug-23

80

60

40

20

0

Idea

Exhibit2:EMfixedincomeyieldsarelowversusUSTsinnominalterms…

%

10

9

8

7

6

5

4

3

2

1

0

bp10009008007006005004003002001000

Aug-09Aug-11Aug-13Aug-15Aug-17Aug-19Aug-21Aug-23EM-US(Nominal,rhs)

BloombergUSTAggregateYield(rhs)EMLocalGovtBondYield

Source:Bloomberg,MorganStanleyResearch

Exhibit3:...andinrealterms

%

6

4

2

0

-2

-4

bp

800

600

400

200

0

Aug-09Aug-11Aug-13Aug-15Aug-17Aug-19Aug-21Aug-23EM-US(Real,rhs)

EMLocalYield-12mFwdConsensusCPI(GBIweighted)USTAggYield-12mFwdConsensusCPI

Source:Bloomberg,MorganStanleyResearch

Istherelativelylownominalyieldontheindexaffectinginflows?MostEMlocalcurrencyfundmanagershavehadagreatrun,withreturnsontheindextheytrackupabout20%inUSDtermssincetheendofSeptember2022.ManyEM-dedicatedfundshavealsooutperformed.Giventhestrengthofthosereturns,fundmanagerscouldbeforgivenforthinkingthatassetallocatersandotherinvestorswouldhavebeenbangingdowntheirdoorsthisyearinabidtoinvestmore.

Exhibit4showsthetotalreturnontheEMlocalcurrencyindex(yes,returnsreallyhavebeenthatbadoverthepasttenyears)versusthecumulativeinflowsasmeasuredbyEPFR.Flowandreturnsarehistoricallycorrelatedand,ifyoulookcarefullyatthepeaksandtroughsofbothindices,youcanseethattheflowstendtofollowthereturnwithasmalllag.Thisisnotsurprising.

Exhibit4:Flowstendtofollowreturnswithasmalllag.Thelackofinflowsinthepast10monthsisdisappointingfortheassetclass

LocalCurrencyFlows(US$bn)

100

-20

LocalCurrencyFlowsCumulativeLCReturn(RHS)

280

255

230

205

180

155

130

105

80

Source:EPFR,Bloomberg,MorganStanleyResearch;Note:TheEPFRdataandchartsdisplayedheremustnotbeextractedandrepublished(whetherinternallyorexternally).SuchusewillviolatethetermsofMorganStanley'scontractwithEPFRwhichonlycoversnamedusers.

WhatissurprisingisthecompletelackofinflowstothisassetclassdespitethestrongrallysinceSeptember2022.Atbest,wecansaythatthestrongreturnshavehelpedto

4

Idea

stabiliseflows,whichisfarfromwhatmost(includingus)wouldhaveexpectedifyouhadaskedushowflowswouldhaveevolvedwiththisreturnoutlook.

Wethinkit'spossiblethatthelownominalyielddifferentialcouldhelptoexplainthelackofinflows.InvestorswithaglobalUSDreturnfocusmaylookattherelativelylownominalinterestrateonofferfromtheassetclassandconcludethatEMhaslittlevalueversusUSfixedincomeinvestments.

WhywouldaUSD-basedinvestortakethecurrencyandcreditriskofinvestinginEMlocalcurrencybonds,whenUSTyieldsareonlyabitlower?InvestorscanremovethedurationrisktooandparkmoneyinUSDcashandearnyieldsonly100bpbelowtheEMindexyield.

WhatdoesthismeanforEMlocalbonds?Twothings:

•EMlocalcurrencybondswillbemissingtheforeigninvestordemandthatcouldhelptosustaintherally,giventhelackofinflows.Thisdoesn’tmeanthatbondscan'trally,giventhedominanceoflocalinvestors.Butthelackofforeigninflowsisaheadwind.It'salsonotgreatnewsforEMcurrencies.

•WewilllikelyneedtheFedtocutrates,orUSTtorally,forflowstoreturntotheassetclass:ShouldtheFedcutandfixedincomefundsbroadlyreceivemoreinflows,EMwouldlikelybenefitandreceiveatleastsomeinflows.Lowershort-endrateswouldincentiviseinvestorstotakemoreriskandpotentiallyweakenUSD,helpingEMlocalmarkets.

ThissecondpointsupportsourviewthatforEMlocalbondstorally,wewilllikelyneedsomesupportfromUSTreasuries.

OurUSratesstrategistsbelievethatUSTreasurieswillrecover,followingtherecentbearsteepeningofthecurve.Theybelievethatthefiscalsupportfortheeconomyislikelytodeclineoverthecomingmonthswhiletheimpactofhigherratesontheeconomyshouldintensifynextyeargiventhehighercorporatedebtrefinancingneeds(seeUnitedStates|MaxLongUSTreasuries,ForReal,August4,2023).

ThiswouldsupportEMfromapureratedifferentialperspective.Yet,thehighdependenceonUSTsuggestslimitedalphaopportunitiesinEM.Moreover,aneconomicslowdownintheUSposesrisksforriskassetsmorebroadly.Sofar,riskassetshaveperformedwellasfallinginflationhasoccurredwithoutmuchofaslowdowningrowth.Shouldthatchange,andEMcentralbanksintensifytheireasingcycles,EMcurrenciesmaynotholdup.WebelievethataneutralstanceoverallonEMlocalmarketsisappropriate.

FourfactorscouldsupportAsiaFXriskinAugust

WeseefourfactorsthatcouldsupportAsiaFXinAugust:

1)Chinacouldcontinuetosurprisethemarketontheupside:DuringourconversationswithclientsfollowingthePolitburomeeting,investorsgenerallyquestionedwhethertheomissionof“propertyisforliving,notforspeculation”inthestatementsignalsarealpolicyshiftandwhatitmeans.ThisremindsusofwhathappenedlastNovemberwhenwehadsimilarconversationsonCovidpolicy.

MorganStanleyResearch5

Idea

BackinNovemberlastyear,thegovernmentstartedtosay"CovidhasreachedanewsituationanditwouldliketooptimiseCovidpolicy".Therewasmuchpushbackagainstourbullishview(seeEMStrategy:AsiaMacroStrategy:AreWeReachingaWatershedMomentforChina?November1,2022)asinvestorsdebatedwhetherthereopeningisrealandwhatitmeansforChineseassets.

Inhindsight,thecombinationof"newsituation"and"optimise"ledtothecompletechangeofCovidpolicy.Now,investorsneedtothinktwiceaboutwhat"newsituation"and"optimise"meanfor"propertyforliving,notforspeculation",withthegovernmentdescribingthepropertypolicyasthe"supplyanddemanddynamicshavereachedanewsituationanditwilloptimisethepropertypolicy".

Weshareinvestors’concernsabouttheeffectivenessofpolicyeasinginthepropertysectorandthestructuralissuesintheeconomy,whichiswhywedon’thavefullconfidenceintheoutperformanceofCNHinto4Q23.However,withsentimentbeingsobearishandgovernmentpolicypotentiallysurprisingontheupside,wethinkthatCNHcanoutperformtacticallyin3Q23.

Forustobemoreconstructiveinthemediumterm,weneedtoseetwocatalysts:1)Effortstoimproveprivatesectorconfidence;and2)Stimulusforthepropertysector.Wehavegotsomeoftheminthepasttwomonths,butmorecouldbedone(seeAsiaMacroStrategy:IsAugustaBadMonthforCarry?forthefulllist).

2)MostAsianeconomiescontinuetorecover:Asoureconomistsnoted,therecoveryinAsianmanufacturingPMIisbroadeningout,asseenbytheimprovementinbothChinaandAsiaexChina’smanufacturingPMIsinJuly.InflationinAsiashouldalsostaylow,withrisksofaccelerationonlyfromAugust(dataforwhichwillbereleasedinSeptember)asforecastbysomecentralbanks.

3)USTcouldreversesomeofthesell-offinJuly:Thesell-offinJulywasmainlydrivenbythestrongADPprintalongwithothersolidUSdataandconcernsaboutbondsupply.LastFriday'sweaker-than-expectedNFPshouldprovidesomerelief.Bondsupplyhasbeenbetterthanexpectedbutwedon’tbelievethatitisasustainedfactorwhichcouldkeeppushingrateshigher.AsdiscussedbyourcolleaguesintheUS,theybelievethatthemarketisusingthepriceactiontofitthenarrative,whichiswrong.

4)DedicatedEMinvestorsareunlikelytocuttheircarrytradesinAugust:ThestrategyforGBI-EMinvestorsthisyearistoOWLatAmdurationandFXversusUWAsiadurationandFXtogeneratecarry.OurclientconversationssuggestthatmostinvestorsareunlikelytocutsuchcarrytradesintheneartermasmostLatAmcountriesarealreadypricinginratecutsandcentralbanksthathavestartedcuttingarestillearlyinthecycle.

MostinvestorsalsopointedtoUSinflationtrendinglowerin3Q23beforebottomingoutin4Q23,whichshouldbefavourableforEMdurationandFX.Hence,4Q23isamorelikelytimeforinvestorstocutthesecarrytradesandlockintheiryear-to-dateoutperformance.Thisimpliesthatthehigh-carrycurrenciesinAsialikeINRandIDR,whichhistoricallyfaceweakseasonalityinAugust,mightnotselloffsignificantlythistime.

6

Exhibit5:Sovereigncreditlikesanddislikes

LikesDislikes

AngolaBahrain

BulgariaBrazilDubaiCostaRica

ElSalvadorIsraelGhanaPeruMexicoUAE

Mozambique

Oman

Ukraine

Zambia

Source:MorganStanleyResearch

Idea

SovereignCreditStrategy:RatesTaketheWheel

SimonWaever,NevilleMandimika,PascalBode,EmmaCerda

EMsovereigncreditinshort:EMperformancehasbeenstrong,drivenbydecliningriskpremiaandthedistressedspace.However,thelatestsignsofmacrovolatilityreturninghavebroughtattentionbacktothecoreratessensitivityoftheassetclass.Giventhatthemovewasrealyield-driven,theweaknessiswarranted,butthebroad-basedunderperformanceinabear-steepeningepisodeislessusual.Whilethecurrentpullbackhasimprovedvaluationssomewhat,wekeepaneutralstanceonEMcredit,withthedislocationofHYtoEMFXandtherelativerichnessoftheA/BBB/BBcomplextoUScreditbothrisks.ThismeansthatwhilekeepingourpreferenceforHYoverIG,weadvocateforhigherselectiveness,preferringAngola,ElSalvador,Ghana,UkraineandZambiainthedistressedspaceandOman,DubaiandMexicoashigher-carryqualitycredits.Thesecreditsalsoofferbetter-valuedavenuestogainsomedurationexposurethantheAratedspace,inourview,wherevaluationsremainrichandcreditcurvesarealreadyflat.

Completetradeoverview

•Relativevaluetrades:BuyANGOL49versusKENINT48,buyCHILEEUR31versusPERUEUR33,buyBGARIAEUR34versusREPHUNEUR06/31,buyMOROC33versusSHJGOV32.

•Curvetrades:Flatteners:BuyNGERIA09/51versusNGERIA09/33,buyJORDAN47versusJORDAN30,buyBHRAIN51versusBHRAIN31,buyBRAZIL50versusBRAZIL31,buyBHRAIN09/29versusBHRAIN10/28.Steepeners:BuyCDS-bondbasis:BuyCOLOM30andCOLOM5YCDS.Cashpricetrades:BuyARGENT41versusARGENT29.

•Quasi-sovereigntrades:BuyPEMEX30,buyESKOM8.45%28versusESKOM6.35%28,buyQPETRO31versusMUBAUH31,buySECO44versusSECO43.

•Tradesclosedsincelastpublication:SellPERU34versusKSA07/33,buyGHANA2035,buyISRAEL07/30versusISRAEL07/50.

Ratestakethewheel

Thefirstsignofaresurgenceinvolatilitythisweekafteratwo-monthperiodofcompressionandHYoutperformancebringsthefocusbacktotheEMcreditmarkets'sensitivitytocoreyields,bothfromalevelandfromaslopeperspective.Thisweek'sUSTreasurycurvebearsteepeningcameonthebackof:1)Highersupplythanexpected;2)ThestrongUSgrowthnarrative;and3)TheUSdowngradebyFitchthathassparkedworriesabouttheUSfiscalbackdrop.Slightlysofter-than-expectedpayrollsdataonFridaydroveyieldsloweryetsawcurvesteepeningcontinue.

MorganStanleyResearch7

UKRAIN(49.60%)

PKSTAN(37.19%)

LEBAN(32.64%)

SURINM(27.96%)

ARGENT(27.60%)

SRILAN(21.99%)

ELSALV(21.47%)

ZAMBIN(16.30%)

BOLIVI(13.03%)

MOZAM(11.95%)

GHANA(10.69%)

EGYPT(10.40%)

BTUN(9.98%)

NGERIA(9.32%)

SENEGL(6.94%)

TURKEY(6.83%)

MONGOL(5.56%)

GABON(4.88%)

SOAF(4.74%)

KENINT(4.70%)

COLOM(4.69%)

ANGOL(3.51%)

JORDAN(3.42%)

BHRAIN(2.82%)

SERBIA(2.63%)

DOMREP(2.62%)

HONDUR(2.48%)

IVYCST(2.08%)

ARMEN(1.94%)

ROMANI(1.90%)

ETHOPI(1.79%)

OMAN(1.57%)

IRAQ(1.54%)

GUATEM(1.53%)

KAZAKS(1.36%)

REPNAM(1.33%)

REPHUN(1.30%)

GEORG(1.27%)

COSTAR(1.13%)

BRAZIL(0.89%)

JAMAN(0.65%)

VIETNM(0.53%)

MOROC(0.45%)

PARGUY(0.38%)

AZERBJ(0.04%)

CROATI(0.00%)

BERMUD(-0.04%)

TRITOB(-0.07%)

PERU(-0.88%)

ADGB(-0.95%)

PANAMA(-1.05%)

QATAR(-1.09%)

MEX(-1.10%)

KUWIB(-1.23%)

URUGUA(-1.32%)

INDON(-1.33%)

KSA(-1.55%)

POLAND(-1.63%)

CHINA(-1.84%)

BELRUS(-1.90%)

PHILIP(-1.92%)

ISRAEL(-2.02%)

CHILE(-2.18%)

MALAYS(-2.31%)

KOREA(-3.00%)

ECUA(-3.93%)

0.75

0.50

0.25

0.00

-0.25

Idea

OurUSratesstrategistsholdtheirmedium-termviewofbeinglongduration(seetheirlatestGlobalMacroStrategist).Allmetricsforinflationarepointingdownwards,withgrowthsettohaveamoresubduedoutlook,whichshouldbebeneficialforrates.Inthenearterm,theyseehighlevelsofuncertaintyregardingtheratespath,withCPIthisweek(August10)astheprimarycatalystinthenearterm.

DoesthismeanthatthefocusforEMinvestorsshouldshiftbacktoduration?Afterall,fortwomonthsEMBIreturnshavebeendrivenprimarilybytheCCC/distressedbucketandriskpremia,ratherthanduration.WithUScreditalsoinrecovery,thishasdrivenEMHY-USHYcorrelationstopost-Covidhighs,whilecorrelationstoTreasurieshavedroppedacrosstheboard.

Exhibit6:ThedistressedandlowersingleBportionoftheindexhasbeendrivingreturns

Totalreturnsince31-May

50%

40%

30%

20%

10%

0%

-10%

IG

HY

Source:Bloomberg,MorganStanleyResearch

Exhibit7:EveninIGthefocusisonriskpremiaandbroadercreditspreads,ratherthanduration

1.00

EMIGsovereigncorrelations

Feb-17Feb-18Feb-19Feb-20Feb-21Feb-22Feb-23

EMIGvsUSIGEMIGvs.EMFX

EMIGvs.SPXRP

EMIGvs.GT10

Source:Bloomberg,MorganStanleyResearch;Note:SPXRP=S&PRiskPremia,GT10=10-yearUSTreasuryyield.

Exhibit8:EMHY-USHYcorrelationsareatpost-Covidhighs

1.00

0.75

0.50

0.25

0.00

-0.25

-0.50

EMHYsovereigncorrelations

Feb-17Feb-18Feb-19Feb-20Feb-21Feb-22Feb-23

EMHYvsSPXRP

EMHYvs.USHY

EMHYvs.GT10

EMHYvs.EMFX

Source:Bloomberg,MorganStanleyResearch;Note:SPXRP=S&PRiskPremia,GT10=10-yearUSTreasuryyield.

Despitethefallingcorrelationrecently,shiftsintheTreasurycurvematter...Onthewayup,itisrealyield-drivenincreasesinUSTyieldsthathitEMtotalreturnsasspreadsstruggletotighten.Thiswasthecaseformostof2022asthehikingcycleaccelerated.HYtendstooutperformIGthankstothehigherspreadcushionavailabletoabsorbsomeofthecoreratesmove.

...asevidencedoverthepastweek:ThelatestmovehigherinTreasuryyieldsthisweekisnotableforthebreadthoftheweakness,whichwesingleoutatthebottomofExhibit9.

8

Idea

IGandHYreturnsfromMondaytoThursday(pre-NFP)werenearlyequivalentat-1.9%and-1.8%,respectively,withIGreturnsbeinghitbydurationandtheHYdrawdownbeingdrivenbywiderspreads.

Exhibit9:EMcreditstrugglestoabsorbrealyield-drivenincreasesinUSTyields,thoughHYfaresbetterthan

IG

SpreadTotalreturn

Start

End

Driver

10YUST

10YIIUST

10YBE

EMBI

EMIG

EMHY

HYvsIG

EMBI

EMIG

EMHY

HYvsIG

02-May-1305-Sep-13

RY

137

157

-20

69

76

217

141

-10.7%

-12.6%

-8.1%

4.5%

23-Oct-1331-Dec-13

RY

53

42

10

-4

4

-29

-33

-16%

-25%

-01%

23%

30-Jan-1506-Mar-15

RY

60

41

19

-52

-66

-184

-118

0.2%

-1.3%

3.2%

4.5%

01-Apr-1510-Jun-15

RY

63

55

8

-24

-12

-50

-38

-1.4%

-3.4%

2.0%

5.4%

14-Oct-1509-Nov-15

RY

37

26

12

-28

-18

-50

-33

0.1%

-1.1%

1.2%

2.4%

11-Feb-1611-Mar-16

BE

33

-1

34

-96

-71

-115

-43

4.3%

3.5%

5.6%

2.1%

08-Jul-1613-Mar-17

RY

127

70

57

-69

-51

-121

-71

0.7%

-4.2%

4.1%

8.3%

07-Sep-1717-May-18

RY

107

69

38

26

21

82

61

-4.1%

-5.3%

-5.1%

0.2%

29-May-1808-Nov-18

RY

46

42

3

13

-19

22

41

-1.2%

-0.3%

-2.1%

-1.9%

03-Sep-1913-Sep-19

RY

44

27

17

-25

-17

-32

-16

-1.0%

-2.2%

0.1%

2.4%

08-Oct-1923-Dec-19

BE

40

11

29

-59

-33

-32

1

1.3%

0.4%

2.6%

2.2%

04-Aug-2030-Mar-21

BE

120

42

78

-76

-42

-233

-192

-1.1%

-5.1%

1.2%

6.4%

05-Aug-2126-Oct-21

BE

39

2

36

4

-4

34

38

-1.8%

-1.7%

-2.1%

-0.4%

03-Dec-2116-Feb-22

RY

70

68

1

-4

-1

-22

-22

-3.8%

-5.9%

-1.9%

4.0%

04-Mar-2206-May-22

RY

140

123

16

-67

-97

-63

34

-5.7%

-10.4%

-2.0%

8.4%

27-May-2214-Jun-22

RY

74

74

0

26

-7

64

71

-5.6%

-5.1%

-7.1%

-2.0%

01-Aug-2224-Oct-22

RY

167

159

7

37

13

-6

-19

-9.9%

-12.6%

-7.3%

5.3%

07-Dec-2230-Dec-22

RY

46

42

4

-23

-17

-15

2

-0.8%

-1.8%

0.1%

1.9%

18-Jan-2302-Mar-23

BE

69

33

36

6

-17

33

49

-3.8%

-3.5%

-4.4%

-0.9%

06-Apr-2307-Jul-23

RY

76

75

1

-59

-24

-93

-68

0.3%

-2.4%

2.3%

4.8%

19-Jul-2303-Aug-23

RY

43

28

15

-11

-10

-11

-1

-15%

-25%

-08%

17%

31-Jul-2303-Aug-23

RY

22

22

0

11

0

19

19

-1.8%

-1.9%

-1.8%

0.1%

Average

76

56

19

-20

-19

-29

-10

-2.2%

-3.8%

-0.9%

2.9%

Median

63

42

15

-23

-17

-29

-16

-1.4%

-2.5%

-0.1%

2.4%

Averagereal-yielddriven

80

69

12

-12

-14

-18

-4

-2.9%

-4.6%

-1.3%

3.3%

Averagebreakevendriven

60

17

42

-44

-33

-63

-29

-0.2%

-1.3%

0.6%

1.9%

Source:Bloomberg,MorganStanleyResearch

WhyhasthelastshifthigherinyieldsnotseenHYoutperform?Twothingstoconsider:First,yieldshavebeenmovinghigherforthepastmonth.IfwetakethefullextentoftheUSTmovefromJuly19onwards,10-yearUSTyieldshaverisenover40bp.ThisisclosetothelevelatwhichEMspreadscannotabsorbfurtherincreasesinbreakeven-drivenUSTyieldsandthespread-to-yieldscorrelationturnspositive(seeGlobalEMStrategist:TheClockIsTicking,February21,2023).

Second,investorshavepointedtothesteepeningoftheTreasurycurve:Asweshowbelow,overthecurrenthikingcycle,wherespread-to-yieldcorrelationshavenormallybeenpositive,bearsteepeninghasbeenmoreconducivetoEMHYreturnsthanbull-steepeningepisodes.However,HYreturnsoverthelastweekofthecurrentbear-steepeningepisodearemorereminiscentofApril-May2022,whereRussia-Ukraineandinflationaryconcernsdrovesentimentweaker.

MorganStanleyResearch9

Idea

Exhibit10:BearsteepeningsinceMarch2022tendstoseeHYoutperformIG,whilebullsteepeningseesIGperformbetter

SpreadTotalreturn

Start

End

SteepeningUST10y

UST30y

UST

10s30sEMBI

EMIG

EMHY

HYvsIG

EMBI

EMIG

EMHY

HYvsIG

07-Apr-22

26-May-22

Bear

9

30

21

67

32

85

53

-4.4%

-4.0%

-4.9%

-0.9%

14-Jun-22

29-Jul-22

Bull

-83

-42

41

52

14

90

75

1.9%

5.1%

-0.1%

-5.1%

26-Sep-22

18-Nov-22

Bear

-10

19

28

-39

-8

-76

-68

3.5%

1.5%

5.9%

4.3%

08-Dec-22

20-Jan-23

Bear

0

22

22

-21

-1

-10

-9

2.3%

0.5%

3.8%

3.3%

08-Mar-23

23-Mar-23

Bull

-57

-20

37

51

25

77

52

08%

28%

-04%

-31%

19-Apr-23

10-May-23

Bull

-15

1

16

4

5

-15

-20

0.8%

1.2%

0.9%

-0.3%

06-Jul-23

13-Jul-23

Bull

-27

-10

17

-4

11

-16

-28

20%

14%

29%

15%

31-Jul-23

03-Aug-23

Bear

22

28

6

11

0

19

19

-1.8%

-1.9%

-1.8%

0.1%

Average

-26

0

26

16

11

19

8

1.0%

1.2%

1.1%

-0.1%

Median

-15

1

22

4

11

-10

-9

1.9%

1.4%

0.9%

-0.3%

Bear

0

24

24

2

8

-1

-8

0.5%

-0.7%

1.6%

2.2%

Bull

-45

-18

28

26

14

34

20

14%

26%

08%

-18%

Source:Bloomberg,MorganStanleyResearch

IfUSTyie