1. Iranian Inflation
A 60% depreciation of the Iranian Rial vs the USD in the last year is filtering into higher inflation. The official rate is running at an annual rate of 18%, up from 10% at the start of the year. Food prices are climbing even faster. Food prices have risen over 8% in the last two months alone.
The people in Iran are protesting in the street over mismanagement of the economy and corruption in the government. When food prices soar, the protests get larger and louder. The black market value for the Rial is 109,000 Rial/USD vs the official rate of 42,000. Actual inflation is probably worse than what is reported.
2. Commodity Roll Yields
The “roll return” for certain commodities has been huge in the last year. The roll return is the profit or loss realized by rolling futures contracts and is independent of underlying movements in the commodity itself. The slope of the futures curve drives returns.
The total return from directly investing in commodities via the futures market can vary enormously. What contract you buy and when you roll can have a massive impact on your return. The roll added almost 58% to the total return for a long futures position in Lumber.
3. Short-Term Rates
The 1-year T-Bill rate hit 2.46% yesterday. The expectation for today’s release of the PCE Core rate is 2%. With real short-term rates approaching 50bp, it is hard to claim monetary policy is still “accommodative”.
After almost a decade of suffering inflation-adjusted losses on cash, a real short-term yield of 50 bp gives investors an attractive alternative to riskier markets. Interestingly, the tighter policy is having a larger impact on international markets than domestic markets.
4. EM USD vs Local CCY
The yield on local currency emerging market sovereign bonds, measured using the Bloomberg Barclays Index, is now 83 bp higher than the similar index that tracks USD bonds of the same issuers. The local currency bonds traded almost 50 bp tighter than the USD denominated issues as recently as the start of the year.
USD investors need to remember the total return in local currency bonds is determined by both changes in interest rates and fluctuations in the currency. With such large movements in EM currencies this year, investors have repriced the risk premium for non-USD EM bonds.
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