21 Aug 2013
Flash: EUR, FX, EM and Treasuries interaction self-reinforcing – BAML
FXstreet.com (Barcelona) - The interaction between EM FX and Treasuries could be self-reinforcing, said research teams at BoA Merrill Lynch.
Key Quotes:
“The Treasury market is vulnerable to a self-reinforcing cycle of rising yields”.
“This has been formed by the shift in causation between the Treasury market and the EM currency markets”.
“Initially, growing expectation of the initiation of Fed tapering in September drove yields higher, which in turn led to selling of EM currencies”.
“However, recent EM currency declines has fed fears of central bank reserve selling and led to rising Treasury yields”.
“This two-way causation raises the risk of a self-reinforcing cycle between the bond and currency markets, where the Treasury reserve assets are themselves vulnerable to losing value”.
Key Quotes:
“The Treasury market is vulnerable to a self-reinforcing cycle of rising yields”.
“This has been formed by the shift in causation between the Treasury market and the EM currency markets”.
“Initially, growing expectation of the initiation of Fed tapering in September drove yields higher, which in turn led to selling of EM currencies”.
“However, recent EM currency declines has fed fears of central bank reserve selling and led to rising Treasury yields”.
“This two-way causation raises the risk of a self-reinforcing cycle between the bond and currency markets, where the Treasury reserve assets are themselves vulnerable to losing value”.