Relative Real Effective Exchange Rates, August 2017 vs ......crosses that are similarly undervalued...

of 7

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BespokePremium.com © Copyright 2017, Bespoke Investment Group, LLC. Bespoke Investment Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

REER, REER On The Wall, Who Is Cheapest of EM All? Over time, real effective exchange rates should be mean reverting; as REERs appreciate, trade competi-

tiveness should weigh on the price of the currency, and vice-versa. Of course, it doesn’t always work

out that way, especially when looking at REERs based on consumer prices (as opposed to unit labor

costs of real output). We were curious which emerging markets had the most overvalued or underval-

ued currencies in terms of REER, relative to one another. In the table below, we show the percentage

difference between the ratio of one currency’s REER to another’s, using the top axis as the numerator

in the pair and the left axes as the denominator. A currency that sees persistent REER appreciation rel-

ative to another’s may be overvalued on a bilateral basis.

As shown, there are 3 standouts for overvalued currencies versus the rest of EM: Bulgarian lev (BGN),

Chinese yuan (CNY) and Czech koruna (CZK) are all 13-20% overvalued versus other EMs (bottom two

rows of the table). They’re most aggressively overvalued versus COP, MYR, MXN, and ZAR, the four

crosses that are similarly undervalued versus peer economies on a REER basis. We note that there are

some interesting patterns: MYR, MXN, and ZAR are all very liquid, widely tracked EM crosses that have

rallied significantly as EM has recovered, despite mixed underlying fundamentals. COP is a highly com-

modity-exposed currency still recovering from the massive 2014-2016 devaluation. On the other side,

CNY was a secular appreciation story until capital outflows started to threaten the Chinese secular ap-

preciation story. BGN and CZK have both seen consistent benefit from close proximity to the Eurozone

and monetary policy that prevents dramatic appreciation against the EUR.

Playing long-term mean reversion in REERs can be a frustrating business, but we do think the is a help-

ful starting point in looking at potential opportunities in EMFX. Next week, we’ll take a look at some

trade ideas in more detail that used this analysis to start with, based on the bilateral exchange rates of

the various countries involved.

BRL BGN CLP CNY TWD COP CZK HKD HUF INR IDR KRW MYR MXN PEN PHP PLN RON RUB SGD ZAR THB TRY

BRL - 12.1% -10.1% 13.8% -15.1% -18.2% 10.4% -9.6% -1.0% 3.6% -0.8% -6.6% -21.1% -24.0% -6.2% 1.5% -7.8% 0.1% -0.1% -0.1% -19.9% 0.4% -14.0%

BGN -20.5% - -26.1% -2.6% -31.2% -33.3% -3.6% -25.4% -14.3% -13.1% -19.0% -22.9% -35.8% -35.3% -22.2% -16.9% -20.8% -12.3% -15.4% -17.3% -35.5% -17.9% -25.4%

CLP 8.0% 24.4% - 26.5% -4.5% -10.1% 22.2% 2.3% 10.3% 15.6% 9.3% 4.4% -12.0% -13.8% 4.6% 11.9% 3.2% 11.3% 9.1% 10.9% -11.0% 10.9% -4.4%

CNY -17.1% -1.2% -23.3% - -27.4% -30.9% -3.8% -21.4% -13.9% -10.6% -16.0% -20.0% -32.7% -33.7% -19.2% -13.1% -19.6% -12.6% -14.6% -14.0% -32.7% -14.5% -25.3%

TWD 10.1% 25.7% 3.0% 29.3% - -8.0% 23.9% 7.0% 12.7% 19.2% 12.5% 8.4% -8.6% -10.5% 8.1% 15.0% 5.9% 13.1% 10.2% 14.3% -7.6% 14.3% -2.7%

COP 20.4% 37.9% 10.2% 39.7% 4.7% - 35.6% 11.8% 22.1% 27.3% 21.1% 14.8% -2.9% -5.4% 15.4% 23.9% 13.9% 23.1% 21.8% 22.5% -1.9% 22.7% 5.7%

CZK -16.0% 2.6% -22.3% 1.2% -27.2% -29.8% - -21.7% -10.8% -9.0% -14.2% -18.6% -32.1% -32.3% -18.3% -12.5% -17.5% -9.4% -11.7% -13.2% -31.8% -13.4% -22.7%

HKD 1.7% 17.2% -4.4% 21.0% -7.3% -14.9% 15.1% - 4.5% 10.7% 3.6% 0.2% -15.5% -16.9% 0.4% 6.8% -1.6% 5.3% 2.0% 6.2% -14.8% 5.8% -9.7%

HUF -5.6% 13.9% -12.5% 12.9% -17.2% -21.0% 11.3% -11.3% - 2.5% -3.2% -7.9% -23.1% -23.5% -7.9% -1.7% -7.5% 1.0% -1.6% -2.3% -22.5% -2.3% -13.6%

INR -7.5% 8.2% -14.2% 9.5% -18.0% -22.9% 6.1% -12.1% -4.2% - -5.6% -9.8% -24.4% -25.5% -9.8% -3.7% -10.7% -3.4% -5.9% -4.4% -23.6% -4.4% -17.2%

IDR -4.5% 11.2% -12.3% 11.8% -16.3% -20.7% 9.4% -11.6% -1.4% 2.4% - -6.6% -21.9% -24.4% -7.6% -0.4% -8.9% -1.4% -2.7% -2.0% -21.5% -0.9% -15.0%

KRW 1.0% 17.2% -6.0% 19.0% -9.5% -15.7% 15.3% -3.6% 4.5% 9.5% 4.3% - -16.7% -18.4% -1.2% 5.6% -2.5% 5.1% 2.5% 4.6% -15.9% 5.1% -9.8%

MYR 21.5% 39.2% 12.6% 42.1% 8.4% 1.3% 37.2% 15.7% 24.2% 30.5% 24.2% 18.4% - -2.4% 18.3% 26.3% 16.3% 24.7% 22.4% 25.2% 0.8% 25.5% 7.3%

MXN 20.1% 42.1% 12.9% 43.2% 8.4% 1.2% 39.3% 16.4% 26.3% 31.4% 23.0% 18.6% -0.3% - 18.5% 25.5% 18.3% 27.4% 23.2% 25.2% 0.5% 24.9% 9.3%

PEN 2.5% 18.9% -5.0% 21.1% -9.0% -14.6% 16.7% -2.4% 5.3% 10.3% 4.3% -0.4% -16.1% -17.8% - 6.8% -1.6% 6.1% 3.9% 6.0% -15.4% 5.8% -9.0%

PHP -4.1% 10.5% -11.9% 12.9% -16.1% -20.5% 8.4% -10.1% -2.6% 2.2% -2.7% -7.8% -22.3% -24.6% -7.4% - -9.0% -1.6% -3.2% -1.5% -22.0% -1.3% -15.7%

PLN 1.9% 21.8% -5.2% 21.8% -10.0% -14.7% 19.1% -3.2% 7.1% 10.6% 3.8% -0.6% -16.7% -17.1% -0.4% 6.2% - 8.4% 5.5% 5.6% -16.3% 5.3% -7.2%

RON -8.2% 12.7% -14.7% 11.0% -19.9% -23.1% 9.4% -13.5% -2.2% 0.0% -6.8% -10.7% -25.7% -25.2% -10.4% -4.3% -9.3% - -3.6% -4.8% -25.1% -5.3% -15.0%

RUB -5.4% 12.5% -14.0% 11.4% -19.6% -21.7% 10.0% -13.8% -1.8% 0.2% -4.6% -10.0% -24.6% -26.0% -9.6% -3.0% -9.2% -0.6% - -3.9% -24.2% -4.0% -15.0%

SGD -3.2% 12.3% -10.5% 14.6% -14.5% -19.4% 10.1% -8.2% -0.8% 3.9% -1.6% -6.4% -21.1% -22.8% -5.8% 1.0% -7.4% 0.1% -1.9% - -20.5% -0.2% -14.2%

ZAR 19.3% 35.3% 10.4% 37.5% 6.1% -0.9% 33.4% 12.9% 21.3% 27.5% 21.2% 15.8% -2.5% -4.9% 15.4% 22.7% 13.1% 21.5% 19.4% 21.9% - 22.4% 4.9%

THB -3.1% 11.8% -10.8% 13.7% -14.8% -19.5% 9.8% -9.0% -1.0% 3.6% -1.1% -6.2% -21.1% -23.3% -6.3% 0.8% -7.7% -0.3% -2.0% -0.5% -20.6% - -14.4%

TRY 8.4% 31.3% 0.5% 29.8% -5.5% -9.4% 27.9% 1.7% 14.5% 17.3% 10.2% 5.1% -12.2% -12.4% 5.4% 12.6% 6.2% 16.3% 13.1% 11.8% -11.4% 11.6% -

Average 0.9% 19.0% -7.0% 20.1% -11.6% -16.7% 16.5% -5.0% 4.5% 8.9% 2.8% -2.2% -18.6% -20.0% -2.1% 5.1% -2.9% 5.5% 3.2% 4.1% -17.9% 4.1% -10.1%

Median -1.0% 15.5% -10.3% 16.8% -14.6% -18.8% 13.2% -8.6% 1.8% 6.7% 1.4% -6.3% -21.1% -23.1% -6.0% 3.6% -7.4% 3.1% 1.0% 2.2% -20.2% 2.7% -13.8%

De

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Numerator

Relative Real Effective Exchange Rates, August 2017 vs 1994 - July 2017 Average

of 7 The Bespoke Fixed Income Weekly 9/27/17 BespokePremium.com


Treasury Yields, Prices, and 30 Year Fixed Mortgage Rate

National Average 30 Year Mortgage Rate (%)

30 Year Treasury Future (Price, Roll Adjusted) 30 Year Treasury Bond (Yield, %)




107.5

107.7

107.9

108.1

108.3

108.5

108.7

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.0

4.1

4.2

200 DMA

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

200 DMA50 DMA

115

116

117

118

119

120

121

200 DMA

50 DMA

1.00

1.20

1.40

1.60

1.80

2.00

2.20

200 DMA

50 DMA

121

122

123

124

125

126

127

128

129

130

131

200 DMA

50 DMA

1.50

1.70

1.90

2.10

2.30

2.50

2.70

200 DMA

50 DMA

152

157

162

167

172

177

182

187

200 DMA

50 DMA

2.20

2.30

2.40

2.50

2.60

2.70

2.80

2.90

3.00

3.10

3.20

3.30

200 DMA

50 DMA

50 DMA



Money Markets, ETFs and Trade of the Week

While our Trade of the Week last week proved

at best painful (EDH8 traded down 3 ticks on Fed

day last week and another 2 since for total PnL

of -$62.50 per contract). On the other hand, De-

cember 2017 versus December 2018 steepeners

traded 3.5 ticks steeper on Fed day and have

moved another 3 ticks steeper since, so the gen-

eral thesis of steepening was definitely correct

even if our judgment of whether it would be of

the bear or bull variety was not. We note that

while steepeners have done well, the real move

in term premium has been on the flies; the Dec

‘17/Dec ‘18/Dec ‘19 fly (long EDZ7, short EDZ8 at

2x weight, long EDZ9) has absolutely exploded as

shown in the chart above. We like owning this fly

(that is, fading the chart above) with sales at 20

and 22 ticks (double the risk of initial entry) with

a target of 10 ticks. The Fed can hike a total of 6

times to get to its estimate of “neutral”; pricing

so many of those hikes to come in 2018 as op-

posed to the years on either side (as the

EDZ7Z8Z9 butterfly does) is a mistake, especially

if one of the hikes comes in December as re-

mains a real risk.

ETF performance this week was dominated by

bond short ETFs, though low duration products

including senior loans also did fine.

Yield 5 Day YTD

Ticker Name Price (%) TR (%) TR (%)

AGG Core US Bond Mkt 109.67 2.51 -0.04 3.19

BIL 1-3 MoT Bill 45.74 0.86 0.00 0.47

BIV Vang. Intrmed. 84.69 2.63 -0.12 3.70

BKLN Senior Loans 23.09 3.64 0.13 1.42

BLV Vang. Long Term 93.49 3.81 -0.35 7.56

BND Tot Bond Mkt 81.91 2.54 -0.08 3.09

BOND PIMCO Tot Ret 106.78 3.26 0.10 4.44

BSV Barc. Short Term 79.84 1.69 -0.01 1.56

CSJ 1-3 Yr Corp. 105.31 1.67 0.02 1.44

EDV Long Dur. Trsy 117.12 2.81 -1.07 9.24

EMB JPM EM Bonds 115.74 4.68 -0.15 8.32

FLOT Floating Rate 50.92 1.59 0.08 1.30

HYG iBoxx HY 88.58 5.02 0.15 5.89

IEF 7-10 Yr Bonds 106.71 1.83 -0.22 3.03

IEI 3-7 Yr Trsy 123.57 1.57 -0.07 1.84

JNK Barc. High Yield 37.28 5.28 0.17 6.19

LQD iBoxx Invest. Grade 120.81 3.18 -0.01 5.33

MBB MBS 107.19 2.31 0.09 2.44

PFF Preferreds 38.81 5.48 -0.08 8.33

PGF Financial Preferreds 18.96 5.36 0.11 9.85

PGX Preferred Port. 15.04 5.65 -0.03 10.23

SCPB Barc. Short Term 30.65 1.83 0.00 1.60

SHM Short Term Munis 48.71 1.01 -0.04 2.31

SHV Short Term Trsy 110.37 0.80 0.01 0.46

SHY 1-3 Yr Trsy 84.46 1.02 0.02 0.60

SNLN iBoxx Sen Loan 18.29 4.31 0.22 1.02

STPZ PIMCO 1-5 Yr TIPS 52.33 0.23 0.09 0.66

TIP TIPS 113.97 2.49 -0.03 1.99

TLH 10-20 Yr Trsy 136.73 1.85 -0.31 4.09

TLT 20+ Yr Trsy 124.99 2.52 -0.73 6.69

VCLT Long Term Corp 93.79 4.11 0.04 7.90

VCSH Vang. Short Term 80.04 2.26 0.05 2.31

TBF Short 20+ Yr Trsy 22.38 n/a 0.79 -6.32

TBX Short 7-10 Yr Trsy 28.18 n/a 0.46 -3.06

Key Fixed Income ETFs

Fid. Cash 0.71 0.000 Fed Funds 1.160 0.000

Van. Prime 1.12 0.000 O/N Libor 1.178 -0.001

Schwab Cash 0.75 -0.002 1M Libor 1.237 0.001

Fid. Munis 0.55 0.040 3M Libor 1.330 0.005

Schwab Govt 0.43 0.010 4 Wk T Bill 0.978 0.000

Blkrock Prime 0.56 0.560 3M T Bill 1.059 0.031

JPM Prime 0.88 -0.001 6M T Bill 1.192 0.004

State St Gov't 0.93 0.001 1Y T Bill 1.302 0.008

GS MMkt 1.10 0.001 Repo 1.020 0.005

Money Market Rates

Money Market Funds Key Short Term Rates

########

########

########

EDZ7-Z8-Z9 ED Butterfly: Past Year

-0.05

0.00

0.05

0.10

0.15

0.20

0.25



Treasury Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Bunds Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Eurodollar Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Inflation Curve: Current vs 3 Months Prior, w/ BPs Change

Bespoke Global Yield Curve: Current vs 3 Months Prior, w/ BPs Change

+8.99

+12.46

+10.52

+13.41

+14.33

+13.98

+12.63

115

145

175

205

235

265

295

1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year

9/27/2017

6/21/2017

-3.6 -6.3

+2.1

+11.7

+17.2

+26.6

+21

-100

-50

0

50

100

150


9/27/2017

6/21/2017

+15

+18

+21

+23.5+20

+19.5+18.5

+19+15.5 +14

+13

130

140

150

160

170

180

190

200

210

220

3 Mo 6 Mo 9 Mo 12 Mo 15 Mo 18 Mo 21 Mo 24 Mo 27 Mo 30 Mo 33 Mo

9/27/2017

6/21/2017

+62.38 +46.12 +40.31

+24.6 +28.81 +20.7

+11.92

140

150

160

170

180

190

200

210

220


9/27/2017

6/21/2017

-11.21-9.18

-6.81

-1.36

-0.35

+4.24

+17.86

220

240

260

280

300

320

340

360

380

400

420


9/20/2017

6/21/2017

Benchmark Yield Curves 2s30s briefly made a new post-recession low this

week at 133 bps but keep in mind that’s over 150

bps above the 2006 2s30s inversion and another

50 bps above the –79 bps inversion from May of

2000. Recessionistas will also be disappointed by

the sharp uptick in curve premiums today, cata-

lyzed by overnight trade and Wednesday data.

We discuss Eurodollar markets in great detail on

page 3, and we also note that the 1y1y OIS

(average Fed Funds rate priced for the 1 year

starting 1 year in the future) is within 5 bps of its

cycle high, almost 25 bps higher than it stood a

month ago, or pricing in an additional hike over

the next year or 2 for Q1 & Q2 of 2019.

For its part, 2s30s in the Eurozone’s benchmark

rates market has steepened back above 200 bps,

to the strongest level since early March. While

swinging in a very wide range, 2s10s has also been

basically trending wider for several years now,

helping support bank profitability across the Euro-

zone.

Despite market readings of much tighter policy

than last month, breakevens have been relatively

resilient; they did make lows post-Fed last week

but are up sharply today despite a huge short

rates move upward and accelerating move higher

in the dollar, both of which should weigh on

breakevens somewhat.

While our Bespoke Global Yield Curve has defi-

nitely steepened out in recent months, this week

was more about synchronized global bond pain

as every major maturity traded higher in yield.

Only 18 of the 105 maturities across all countries

that we track traded down by at least 1 basis

point this week while more than 20 traded up by

at least 7 bps.



Bespoke Global Yield Curve: 2 Year Bespoke Global Yield Curve: 5 Year

Bespoke Global Yield Curve: 10 Year Bespoke Global Yield Curve: 30 Year

Bespoke Global Yield Curve: 2s10s Bespoke Global Yield Curve: 5s30s

230

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430

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140



Curves, Spreads and Total Returns

High Yield Corporates

Municipal Bonds

Mortgage Backed Securities

Emerging Markets2 Year vs 10 Year

5 Year vs 10 Year

5 Year vs 30 Year

10 Year vs 30 Year

10 Year Italian BTP (vs German Bund, not Treasury)

Municipal Bonds

10 Year Swap

High Yield Corporates

2 Year vs 5 Year 10 Year German Bund Long Dated Treasuries

Treasury Curves (BPs) Spreads vs Treasury (BPs) Total Return Over Past Year (BPs)

30

40

50

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90

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140

35

40

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50

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-240

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-4

0

4

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12

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-20

-16

-12

-8

-4

0

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0

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0

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600



Page 2: These charts track the performance of the yield of Treasury bonds and their price in the fu-

tures market over the past year. Also presented is the National Average 30 Year Fixed Rate Mortgage

according to bankrate.com’s index of mortgage lending.

Page 3: At upper left is a table summarizing the level and change of short term interest rates. Money

market fund rates represent the highest yields available to large money market fund investors for a

spectrum of funds. Next to the money market fund rates are benchmark short-term interest rates.

Each change represents the change in yield over the last five days. At lower left we show a grid of ma-

jor fixed income ETFs and include yield, five day change, and year to date total return for each ETF.

Our Trade of the Week is intended as a starting point for further research.

Page 5: Benchmark yield curves are “risk free” interest rates that other fixed income securities trade

relative to. All yield curves are expressed in basis points. Three month changes in the curves are

shown in basis points at each point on the curve. The Bespoke Global Yield Curve is a Purchasing Pow-

er Parity Gross Domestic Product-weighted average of nominal yields for the world’s fifteen largest

economies. It is graphed versus the yield curves for the United States and Germany, the two most-

followed global benchmarks.

Page 5: Time series charts for the yields of the Bespoke Global Yield curve, presented in basis points.

Page 6: The Treasury curve charts in column one show the difference in yield between the second

security listed and the first. For instance, if 2 Year Treasuries currently yield 0.45% and 5 Year Treasur-

ies yield 1.45%, the “curve” between 2 Years and 5 Years is 1.00%. Typically, a flattening yield curve (a

chart of the curve moving downwards, or the difference between the two yields narrowing) is an indi-

cation of economic headwinds, but the absolute level of the curve between Treasuries can be as im-

portant as the change in that curve.

The spreads column shows yield differences between Treasuries and other important sectors of the

fixed income market. Each spread is expressed as the yield on the bond in question. For instance, if

Italian 10 Year government bonds or “BTPs” yield 3.50% and 10 Year Treasuries yield 3.00%, the spread

between them is 0.50%. This spread can be negative. All else being equal, a positive spread to Treas-

uries indicates increased credit risk. But when spreads are measured between two different currencies

(for instance, between German Bunds and Treasuries), a negative spread to Treasuries can be caused

by different inflation expectations, real growth rates or other differences between the currencies in

question.

Finally, the total return indices in the right hand column show the total return for Bank of America

Merrill Lynch bond market indices in each sector listed. Total return shows both coupon income and

price appreciation for each basket of bonds. These total returns are graphed as total return over the

prior year, starting from zero as of one year ago today.

The Fixed Income Report Explained

Relative Real Effective Exchange Rates, August 2017 vs ......crosses that are similarly undervalued...

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