"Emerging Markets always give Second Chances" 🌳

Revisiting EM debt at pennies on the dollar

Eons ago, in October 2023, I wrote about Buying Emerging Market Sovereign Debt for pennies on the dollar .

That was of course the UK 2061 guilty Gilt, which was trading at 25c on the dollar.

It had since rallied to 35c, partly thanks to the Yellen + Powell double whammy.

But now it has peeled back to 29c, as inflation fears re-emerge in the UK: the December CPI print came in at 4.0% compared to 3.9% in November. Given that the UK is an inflation-prone Emerging Market, everyone panicked that we are back to square one. The funny detail is that inflation was impacted quite a bit by tobacco, alcohol and air fares, as if anyone wanted further proof of where the Brits spend their money.

Fast forward to today, and retail sales came out abysmal: down 3.2% in December, which was <checks notes> … THE WORST SINCE COVID!

I dunno. Call me an inflation party pooper if you want, but I have a sneaky feeling we will be talking again about a recession and / or slowing inflation in the UK before you know it.

So I kinda like this guilty Gilt 2061 here, as an asymmetric bet:

• IF there’s a recession / disinflation then it goes >35c

• IF the UK becomes Venezuela, it goes to 20c

Regular readers will know that I have a view of Inflation re-emerging PROPERLY but that will take a bit more time than some expect.

In the meantime, the chart below that is not from Harvard Business School, summarizes the trading of long duration bonds during this period of Inflation “Start / Stop”.

Godspeed.

Disclaimer:

This isn’t financial advice.

This is the trading blog of a shrub.

By now you should know: Don’t be Stupid.

Like, seriously … Don’t be stupid …