GEMs Viewpoint: Markets still misprice EM monetary cycles

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GEMs Viewpoint: Markets still misprice EM monetary cycles

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GEMs Viewpoint

Markets still misprice EM monetary cycles

Pay when central banks hike, receive when they cut 01 July 2026 Corrected

We test the intuitive rule that the best strategy is to pay the front-end when a central GEM FI & FX Strategy

bank hikes rates (and receive when it cuts). In only a handful of cycles has this not Emerging Markets Global

worked. In some cases (for example, the latest Czech easing cycle) receivers performed Mikhail Liluashvili

better for 1y swaps than for 2y or 1y1y, as the terminal rate was anchored by the central EEMEA Local Markets Strategist

bank. We then test different rules for receiving or paying the front end. MLImikhail.liluashvili@bofa.com(UK)

Simple rule and 1y trades usually outperform alternatives DavidGlobal EMHauner,FI/FX CFAStrategist>>

For most countries, a simple rule and 1y trade (rather than 1y1y or 2y) outperforms MLIdavid.hauner@bofa.com(UK)

alternatives. The simple rule is as follows: we pay/receive the 1y swap after it crosses Claudio Piron

the interbank rate from below/above; we switch the position only when the 1y swap Emerging Asia FI/FX Strategist

crosses the interbank rate from above/below again. In this rule, we always receive or pay Merrillclaudio.piron@bofa.comLynch (Singapore)

rates. We assume zero transaction costs. For other rules, please see Appendix. Raghav Adlakha

EM Quant/Sovereign Strategist

Three reasons why the market underprices cycles MLIraghav.adlakha@bofa.com(UK)

First, monetary cycles are usually long and forecasting ability declines as horizons Ezequiel Aguirre

lengthen. Second, the market requires a risk premium that rises over time, in case it is LatAm FI/FX Strategist

wrong.