EM sovereign credit initiated a rebound at the turn of the quarter (+3 per cent QTD) as Treasuries bounced back after having registered the worst quarterly returns since the early 1980s (-4.3 per cent for the Barclays US Treasuries in Q1), according to the latest weekly hedge funds brief from Lyxor's Senior Strategists Jean-Baptiste Berthon and Philippe Ferreira, and Hedge Fund Analyst Pierre Cerryn.

In line with broader market developments, EM Global Macro strategies rebounded quarter-to-date, up +1.6 per cent as of 7 May, but still down -1.3 per cent year-to-date. The rebound in EM currencies was also supportive and as such, Lyxor has revisited their stance on EM Macro strategies.

In Lyxor’s view, the market environment should remain adverse, with Treasury yields expected to head towards 2 per cent.

Lyxor’s stance on the strategy was downgraded in March to Neutral and it has now been downgraded to Underweight. Lyxor remain defensive as US inflation prospects are putting renewed upward pressure on Treasury yields and the USD.
However, there is some room for arbitrage considering the diversity of local situations at the issuer level. Talented managers can take advantage of such opportunities. Several strategies are hedged against rises in Treasury yields, but Lyxor suggests selectivity and expects EM Macro to underperform.