The Zhitong Finance App notes that analysts pointed out that since the US Treasury's treasury bond repurchase program weakens the US dollar, investors looking for new opportunities may drive capital to pour into emerging markets.
Last month, US Treasury Secretary Bezent doubled the size of long-term US government bonds he plans to repurchase to ease the sharp pressure on long-term yields caused by market concerns about inflation and debt.
Robin Brooks, a senior research fellow at the Brookings Institution, said in an article last week that the market is looking for places where they can “avoid a debt spree.”
Brooks said that as some major developed economies try to reduce long-term government bond yields, it is expected that emerging markets will usher in “huge amounts of capital,” which will eventually support arbitrage transactions — that is, borrowing cheap currencies and investing in higher-yielding assets.
He pointed out that the biggest risk facing arbitrage trading, that is, a sudden surge in borrowing costs, was mitigated by US government intervention.
According to data from Canada's TD Securities, in the week ending Wednesday, global emerging market bond funds recorded inflows of US$967 million, an increase of about 15% over the previous week, despite a slowdown in overall capital inflows to bond funds.
As investors sought safe haven, the price of gold also benefited from Bezent's intervention. Deutsche Bank and Bridgewater Fund founder Ray Dalio all supported this precious metal.
Peter Kinsella, head of global foreign exchange strategy at United Private Bank in London, said the Treasury Department's announcement sent a signal to the market that “the US may adopt policies similar to financial suppression.” He added: “This has weakened the dollar, and high-yielding G10 currencies and emerging market currencies have benefited as a result.”
Data from the London Stock Exchange Group (LSEG) shows that since Bezent announced the bond repurchase, the Korean won has risen 2.83% against the US dollar, the Brazilian real has risen 0.64%, and the South African rand has risen 0.59%.
Kinsella pointed out that the general environment conducive to excellent performance in arbitrage trading, such as low volatility and a general decline in inflation, still “exists steadily.”
He said that among emerging markets, Brazil and Turkey are popular because they continue to show high levels of nominal returns and real returns after excluding inflation. Among the G10 currencies, he added, Australian and Norwegian currencies are more popular.
Brazil has one of the highest real interest rates among major economies. As of mid-August, its benchmark interest rate was 14%, and the 12-month inflation rate was 4.2%.
Turkey's central bank kept the one-week repurchase rate unchanged at 37% in July, despite the country's annual inflation rate of 31.75%.
Wee Khoon Chong, an Asia-Pacific macro strategist at Bank of New York Mellon in Hong Kong, said Colombia is “very popular” in arbitrage trading this year.
As of last Friday, the country's currency has accumulated a cumulative increase of about 20% since this year, and the benchmark stock index COLCAP has also risen by about 20%.
Meanwhile, Eric Robertson, chief strategist at Standard Chartered Bank, said on Monday that the performance of Asian currencies is expected to continue to lag behind similar currencies in emerging markets. This has reduced the attractiveness of Asian currencies as investment targets.
He pointed out that compared to other currencies, Asian currencies tend to offer lower implied yields, and if the Federal Reserve tends to raise interest rates, this pattern may remain the same.
The Bank of India's policy interest rate is among the highest in Asia at 5.25%, yet it is still only nearly one-third of Brazil's.
Brooks said that since emerging markets have previously experienced “large-scale capital outflows” due to the war with Iran, arbitrage transactions funded in US dollars have only just begun.
He added that the Treasury's bond repurchase announcement indicates that “more places may take stronger measures” as time goes on.