In pricing fixed income securities, a lot hangs on the difference between the mean, median and mode. Markets reflect a probability-weighted average of potential outcomes (i.e. the mean); policymakers typically focus on the single most-likely outcome (i.e. the mode). Thinking carefully about the difference has important implications for how we view interest rate risks.
‘Less is more!’ That is what correlation wants to brag about to enhance diversification. However, following the financial crisis, many believe that correlations are at an all-time high – is this the end of low correlations? We think not.
Low interest rates can be considered both a blessing and a curse. The blessing is that the government yield curve impacts discount rates used across almost all financial assets. The curse is that they incentivise changes in economic structures (e.g. higher debt) which, in turn, make low interest rates more entrenched. The blessing and curse of low interest rates is therefore that they are (probably) here to stay.
Are we starting to see the promise from emerging market local currency debt? Emerging market local currency debt has had strong returns year-to-date but we remain cautious on its future outlook. Here we look at three charts that give us an insight into this asset class.
First it was Cristiano Ronaldo at the Euros, now it is Salvador Sobral at Eurovision. Portugal sits proudly on top of the sporting and cultural pile in Europe. Less obvious victories have been apparent in the rapid improvement in its fiscal arithmetic, and the significant outperformance of its bond market.