A practical, data-driven guide to trading fixed income and FX in emerging markets, written by three Citi strategists with 40+ years of combined experience.
Trading Fixed Income and FX in Emerging Markets by Dirk Willer, Ram Bala Chandran, and Kenneth Lam is one of those rare finance books that actually tells you what works and what doesn’t. Published by Wiley in 2020, the book covers everything from global macro drivers to specific trading strategies for EMFX, rates, and credit, all backed by rigorous backtesting.
The authors argue that emerging markets are 65% global macro and 35% local factors. They show how the Fed, the US dollar, commodities, and risk appetite drive EM assets, and they explain how to position around these drivers. The book covers carry trades (which have broken down in simple form), China’s outsized influence on EM, event-driven strategies like emergency rate hikes and IMF packages, inflation-linked bonds, credit cycles, and portfolio construction. Each chapter provides empirically validated rules of thumb that practitioners can actually use.
What sets this book apart is its honesty. The authors don’t just show what works. They spend equal time explaining what doesn’t work, even when conventional wisdom says otherwise. Simple carry is dead. Playing it safe by buying only investment-grade currencies doesn’t pay. Flows are a lagging indicator. And the beloved NFP release barely moves EMFX. This kind of noise reduction is just as valuable as the profitable strategies themselves.
Most books about trading fall into one of two buckets. Either they’re pure theory with no real application. Or they’re war stories that sound cool but don’t help you build actual strategies. This book is neither.
Emerging market debt is one of those things that sounds exotic until you look at the numbers. Then it just sounds obvious.
Previous: EMFX and Fixed Income - Where the Opportunities Are
Book: Trading Fixed Income and FX in Emerging Markets | Authors: Dirk Willer, Ram Bala Chandran, Kenneth Lam | Publisher: Wiley, 2020 | ISBN: 978-1-119-59905-0
In Part 1, we covered how US rates and the dollar cycle drive emerging markets. Now we get to the rest of the global macro toolkit: commodities, the VIX, and a sleeper driver that most people underrate: US high yield spreads.
Book: Trading Fixed Income and FX in Emerging Markets Authors: Dirk Willer, Ram Bala Chandran, Kenneth Lam Publisher: Wiley (2020) ISBN: 978-1-119-59905-0
In Part 1, we covered how China became the most important emerging market on the planet. Its economy is so large that it basically drives the entire EM asset class. We looked at trade links, commodity demand, leverage concerns, the current account surplus disappearing, and the capital account slowly opening up.
Chapter 4 is where this book gets really practical. The authors stop talking about what drives EM and start talking about how to trade it. And they begin with the most famous strategy in FX: the carry trade.
Previous: How to Trade EMFX Part 1
In Part 1 we covered carry strategies and how they’ve been slowly dying. Now let’s get into the stuff that actually works better: growth, valuation, momentum, flows, seasonality, and volatility. This is where the chapter gets really interesting.
EM policymakers really, really care about their exchange rates. Way more than developed market policymakers do. And for good reason. FX matters more for inflation in emerging markets. There’s way more USD-denominated debt floating around. And politically, a collapsing currency is basically a death sentence for the sitting government. The FX rate is the most visible report card for whether the government is doing a good job.
Chapter 6 is where the book gets into the real meat of EM rates trading. And the first thing it tells you might be surprising: before you can trade EM rates, you need to understand US rates. Because the Fed drives everything.
Previous: EM Rates and the Fed Cycle
In the first half of this chapter, we talked about how the monetary policy cycle works in EM and how it mirrors (but isn’t identical to) the US cycle. Now we get to the really juicy stuff: why inflation behaves so differently in EM, how to forecast it, and when to actually put trades on around central bank pivots.
Previous: EM Rates - Inflation and Central Banks
Chapter 7 is titled “Real Rates: Simply Superior.” That’s not a suggestion. It’s a thesis statement. The authors make a strong case that inflation-linked bonds in emerging markets deserve way more attention than they get. And honestly? The data backs them up.
Previous: Real Rates - Simply Superior
So you know the big picture stuff about trading EM rates. You’ve got your frameworks, your carry analysis, your real rate models. But what do you actually do when stuff happens? When CPI prints hot, when a central bank drops a surprise, when a country gets added to a bond index, when an earthquake hits?
Here’s the thing about EM credit that nobody tells you upfront: the structural trade is basically dead. You’d think that because emerging markets grow faster than developed ones, their credit spreads would keep compressing over time. More growth, less risk, tighter spreads. Makes sense, right?
Previous: EM Credit Part 1 Next: Portfolio Construction
Book: Trading Fixed Income and FX in Emerging Markets Authors: Dirk Willer, Ram Bala Chandran, Kenneth Lam Publisher: Wiley (2020) ISBN: 978-1-119-59905-0
So you’ve learned how to trade EM credit, local rates, and FX. Now what? How do you actually put it all together into a portfolio? Chapter 10 is about the nuts and bolts of portfolio construction, and it has some genuinely surprising findings about indexes, risk parity, and why ESG is unfair to poor countries.
The investment industry loves a good buzzword. And for the last several years, “big data” and “machine learning” have been the ones getting all the attention. Fund managers talk about them in the same breath, like they’re the same thing. They’re not. And the authors make that distinction very clear in this final chapter.
So we made it. Eighteen posts later, we’ve walked through the entire book. Let me try to pull it all together and tell you what I think.