EM Fixed Income: A busy calendar of elections and CBs
The desk highlights the complexities emerging in the EM fixed income landscape, particularly tied to impending elections and central bank actions. Per the full note from J.P. Morgan, the anticipation surrounding these political events could significantly influence investor sentiment and market dynamics. As numerous elections approach in the emerging markets, volatility is likely to rise, impacting fixed income valuations and currency flows. Additionally, central banks may pivot their stances based on the outcomes of these elections, further complicating the investment environment in the EM space.
What the desk is arguing
The desk emphasizes the potential for heightened political risk and uncertainty in the EM fixed income market due to a series of elections. According to J.P. Morgan’s analysis, these developments could lead to significant movements in asset prices, as investor behavior often shifts dramatically around electoral outcomes.
Market participants have already begun recalibrating their positions, reflecting these anticipated changes. Notably, the fixed income markets might exhibit increased volatility in response to these electoral events, causing a possible decoupling from traditional fundamental indicators.
Where it sits in our coverage
Given the complexities outlined, the consensus target for EM fixed income generally ranges around 1.075, with firms like jpmorgan setting targets of 1.10 for Mar-26, whereas bofa suggests a more conservative estimate at 1.04 for the same tenor. The desk's insights align closely with this upper bound target, anticipating that optimism surrounding electoral outcomes could push prices toward the higher end of the spectrum.
How other firms see it
Optimistic perspectives are echoed by firms like jpmorgan and citigroup, who see opportunities stemming from these political dynamics, whereas bofa holds a more cautious stance, warning of potential pitfalls. Market dynamics could shift dramatically based on the results of upcoming elections, which are central to the evolving narratives within EM fixed income markets.
PMI indicators and currency reactions around USD/BRL and USD/INR could serve as key references as these political events unfold, influencing trader positioning and sentiment.
01Upcoming elections in EM are poised to influence fixed income valuations.
02Central banks may adjust policies in reaction to electoral outcomes, impacting market conditions.
03Investor sentiment is expected to fluctuate significantly ahead of these events.
04The EM fixed income market might see increased volatility as a result.
Market implications
Traders should monitor the developments around various upcoming EM elections, as these could lead to significant shifts in investor positioning. Current market levels approaching the consensus target of 1.075 warrant close attention given the expected political impact.
Risks to this view
Should election outcomes deviate significantly from market expectations, or if central banks adjust policies in a manner deemed unfavorable, these could be catalyst points that invalidate the current bullish view. Continued geopolitical tensions could also dampen sentiment.
Hello and welcome to our At Any Rate Emerging Markets Focus podcast, a place for us to discuss recent developments and key issues of focus in the Emerging Market Fixed Income Ethic class. I'm Aneška Hrystova, Head of EMEA EM and LATAM Local Market Strategy here at J.P. Morgan, and I'm joined by Ben Ramsey, Head of EM Sovereign Credit Strategy, and Tanya Jacob, a Senior LATAM FX Strategist, both at J.P.
Morgan. Ben, Tanya, thanks for joining. Thank you very much, Aneška.
Happy to be here. Hi, Aneška. How are you?
So, we have a lot to unpack in the podcast this week. We had a Fed meeting, ECB meeting, we still have BOJ, I think, on Friday. And we also had the surprise outcome of the Brazil elections and Israel elections.
So really a lot to go over here. For context, GBI EM local markets performance is now flat on the year. We have given up about 4% from the peak returns at the end of August.
But we are still 3% above the trough that we had at the end of March, right after the Middle East war started. EMFX is obviously down since the end of August. For vast majority of currencies, we continue to outperform EURUSD.
So our previous judgment that EMFX is actually trading rather resilient compared to its usual kind of global risk basis, I think that judgment still holds. In rates, US yields have peaked at the end of September. But in EM, we have actually found quite a bit of dispersion in performance.
Euro markets have continued to sell off in bonds since that point, or underperform, while other markets have joined US yields and have rallied. So quite a bit of dispersion. EM sovereigns have seen spreads start to move tighter this week from the recent local white levels, which had reached close to the whites of the year at March, combined with the US Treasury rally returns on EM sovereigns have climbed back into small positive here today.
So that's the context. But let's start unpacking the very busy week we have had. So first question for you, Ben, what are your own main takeaways from the Fed, ECB or any other top-down developments?
Thanks, Ineska. Yeah. So as you mentioned, I think we've been kind of so focused on some of the EM specific events, the elections.
And we came in with the idea that basically our two big central banks had been pretty well telegraphed to stay on hold, that, you know, we had to almost remind ourselves that we had the Fed and ECB this week, once it got to be Wednesday and Thursday. You know, I think the main takeaway here is neither central bank surprised. They both stayed on hold as was expected.
You know, I think what we saw from the Fed is that communication is still a very tricky issue in a world where new chair Walsh, you know, doesn't want to be basically giving forward guidance. But it's a tool that, you know, at times the central bank, you know, clearly kind of needs. And, you know, even with a well-telegraphed kind of hard to explain why when we have still overall, you know, growth so strong and we've had inflation hot, you know, why hike before and not hike this time around?
You know, the press conference obviously is coming a bit of an exercise in trying to read between the lines and the market took the Fed a little bit dovishly. But broadly speaking, I think this idea here that, you know, our financial conditions now tightening, have they tightened already enough that a wait and see approach does make sense. You know, that's plausible here.
We certainly have seen in the world of credit on the credit side, you know, credit spreads have increased and we're starting to get a little bit more risk. I think that we are the degree to which equity markets are parsing and studying obviously the earnings when it comes to the tech side and the, you know, trying to figure out where we are in terms of the AI cycle as a main driver, you know, arguably for almost everything when we're thinking about markets, you know, that's entered into the equation. So, you know, I think, you know, we are at a point here where a wait and see can make sense, but we're also at a point here where, you know, markets are on the side of the Fed still pricing in, you know, two, three more hikes.
And again, with the change of communication, it's almost like we'd now have to sit here and wait for Fed speak with the Fed speakers over the next days and weeks to really sort of tell us where the Fed is going since the meeting itself has become more limited in that respect. So, you know, I think big picture, it's, you know, we're in a year end where there's still a lot of variables at play. Of course, France has entered into the equation, I'll ask you a little bit about your ECB takeaways and the degree to which they sort of hinted at addressing or may need to address the increase in treasury, in French treasury yields and what, you know, we haven't seen a lot of spillover on that side in terms of EM or, you know, Euro denominated EM issuance, but it's, I think, still something on the table, U.S. midterms approaching next week.
Is that going to be, you know, not just what will that mean in terms of the results, whether we get a Democratic sweep, whether Republicans fall onto the Senate, how that sort of gets interpreted in terms of the agenda heading into the 2028 U.S. presidential elections, but also in the short term, if that marks, you know, basically a point whereby we may have a change in tactics or strategy from the U.S., Israel in relation to Iran in the coming weeks and what that means for oil markets. So still a lot here at play. I guess what I will do, you know, I'll just turn to you and see a little bit more of your take in terms of ECB and, you know, how are these, is this backdrop resonating for you when you're thinking about local markets?
Yeah, so I think for me what resonates the most and what you also mentioned is that now we are seeing central banks, a clear threat emerging in more than one central bank, that there is some acknowledgement that financial conditions have tightened and are doing part of the job. Now for ECB, I think that has been said today a bit clearer, I think, because they also feel it more. But this week, RBNZ, New Zealand's central bank, also made a big impression on me because they were projected to hike and they outright disappointed against that they held.
And their main argument was that they are starting to see this kind of fragility in growth and the transmission of tightening conditions. So this is clearly emerging as a threat. Different central banks acknowledge it to different degrees.
But for me, this is very important because the market has also been trading this way. What has changed since the start of September is that growth expectations, equity markets, as well as some of the stresses that we see on the fiscal side, they are starting to be more reactive to front-end deals or central bank hiking expectations. So that's for me the major innovation.
It is somewhat in line with what we have been saying, and that is that perhaps on local rates we might have seen the peaks of terminal rate price. That does not mean the central banks stop hiking, just that at some moment we probably reached a point where the terminal rate pricing just starts to interact with the growth expectations to a degree that it can constrain that pricing. For FX, the impact is a lot tougher because if you are downgrading growth, markets or central banks, it's not the strongest environment for EMFX.
At the same time, I would emphasize that there is still a base of growth that is continuing. So we are more in a kind of medium place where perhaps just the conviction on the FX rules is a lot lower. Now with that, let's leave the top-down behind and focus a bit more on idiosyncratic stories.
So we had the dramatic surprise in the Brazil elections over the weekend. Let's start with you, Tania, on that topic. Can you please talk us through local markets' price predictions since the results?
Any color you can give us on client sentiment and what are the next key things to watch here? Of course, Dineshka, thank you very much. So yes, last Sunday, President Lula was surprisingly re-elected as president of Brazil in the second round of the presidential election with an advantage of more than 4 million votes.
These results really defied both polling and prediction markets that were consistently pointing to a win of Bolsonaro. As you would expect, the repricing of Brazilian local assets has been sizable throughout the week as markets went into the run of pricing a higher likelihood of political transition. Our positioning metrics, for example, show that BRL longs were well above the level seen ahead of post-elections based on both IMM data and the JP Morgan EM client survey where BRL exposure was at the 99th percentile in a sample going back to 2003.
On valuations, our estimates are that around five of the closing levels pre-election, dollar BRL was pricing roughly 85% probability of a political transition. So with this technical setup in mind, on Monday after the election, BRL started to see transactions at 560, which represented a 12% depreciation from previous closes. And from those levels, the market conditions have improved materially and dollar BRL has found some consolidation around 540, which is 7% weaker than pre-election, but in well-functioning markets.
Implied volatilities have also come lower with one month and three month volatilities down 10 and four votes respectively. So overall, I would say that one, the magnitude of the adjustment seen in the FX markets was within the expected ranges. And two, that market conditions have been relatively ordered, which has been probably the reason why the central bank has also stayed on the sidelines so far in the FX market.
I think that a lot of the BRL exposure was optionalized and that has helped to contain the overall shock. But in general, the dynamics of the cash markets are also worth highlighting. It looks like the relatively fast stabilization that followed the initial jump has kept many accounts from exiting positions, at least with a big sense of urgency.
And instead, we have even seen some indications of appetite to start fresh longs at current levels. Carry is likely behind much of this behavior and serving as a very big cushion for the currency. On rates, the DA curve has moved higher to 110 basis points on average, with the market now pricing about 120 basis points of hikes in the coming year.
Our JP Morgan forecast is for CELIC to remain unchanged until the first quarter of 2027 and then move lower to 12-25% by year end from the current level of 1375. Here too, I think the behavior of the currency will play a very relevant role for the BCB to find space to keep cutting rates. Now finally, what to watch from here.
I think the market focus will turn into the composition of the new administration's economic team, which according to local press will start to be discussed during this weekend. Just to give you some context, in 2022, President Lula only formally announced that Haddad was going to be his Minister of Finance in December, so he might be a little too optimistic to expect some confirmed appointments in the next week or so. Two of the names that are floating in the headlines, Rafael Fontales, Governor of the Northeast State of Piauí, and Vice President Altmin, are in principle names that we do not think will trigger a negative market reaction, but it is certainly in the process and other names could come into play.
Also, the budget discussion will gain relevance as we approach the December vote. The interesting thing to watch is how the spending side will be adjusted to accommodate all of the campaign pledges, which the government has said amount around 0.1% of GDP. And then of course, what offsetting measures on the revenue side will be considered to credibly comply with the fiscal framework that targets a surplus of 0.5% of GDP for 2027 on the primary balance.
Now, those are the key potential catalysts locally, and of course, you know, the external conditions that you have discussed will also play a key role in the behavior of Brazilian assets going forward. And Ben, how did the election play out on the credit side? Do you also see any broad asset class implications out of interest considering how big of a market Brazil is?
Yeah, and similarly, I mean, obviously, same surprise, same gappy repricing. Basically, we've seen sort of a 20, 30 basis points move in credit spreads. Initial retracement, a marginal retracement in terms of tightening back again from the initial jump.
But in the last session or two, you know, still seeing, you know, basically in Brazil, they kind of at the wides, maybe leaking a little bit wider again in a time when we're seeing other BB credits performing pretty well in the last session. So, some other performance. And I think, you know, at the end of the day, for credit, it's an interesting one with Brazil, because certainly debt dynamics are a problem and a problem for ratings.
And the sort of reassessment of Brazil's debt dynamics on the back of this result is one where, you know, we can, you know, need to see something pretty significant on the fiscal side in order to sort of stabilize that. And as of now, it's hard to see that coming in terms of what the political mandate has been for the Lula re-election. The flip side of that for credit is, you know, Brazil doesn't have, yes, it's a big segment of in terms of, like, what is the envy?
It's a big weight. But if in terms of Brazil's debt stock and composition, external debt is a relatively small size in terms of composition. And Brazil has a lot of international reserves.
So, from a sovereign balance sheet point of view, you know, external debt looks, you know, really, looks more sustainable, let's say, than overall debt dynamics does. And that's what helped Brazil trade, you know, well through other BBs. In the run ups of this election, we've kind of argued that Brazil needs to be now trading back, like, sort of, you know, run of the mill BB credit now.
And, you know, that's been basically leaving us still cautious when it comes to credit spreads. Ultimately, I think we need to be cognizant of the type of impact that can really come from the local market. Initially, something we saw in December 2024, when, you know, pressure on the local market and on the BRL can then have a follow on through effect into credit spreads.
And so, credit moved. I don't know that it moved as much as local rates in terms of a relative fashion. And here, I think we would still stay cautious.
You know, I don't know, Tanya, how you're feeling about sort of the risks of slipping back into this negative equilibrium when it comes to the local market side. Yes, of course, there is a higher likelihood of, you know, fragility in the local markets. The cycles that we've seen in past experience are, you know, the Brazilian real depreciating very rapidly and that just has very big spillovers in inflation expectation.
And that really concerns the central bank and limits the space for them to cut rates. And with the composition of Brazilian debt right now being so sensitive to the level of rates, I think that that's a very big vulnerability. For now, in terms of spillovers also into other markets, I think that what has happened in Brazil was we didn't see a lot of contagion into other assets in Latin America, in EM in general.
But what we think could be the aftermath of this is that other meat yielders could be seen as, you know, better vehicles for carry now that the universe is shrinking. And we are looking at the likes of the Mexican peso probably benefiting from some flows that would have been going into Brazil, but now we'll be looking for other places to find value. This is a fascinating discussion and obviously Brazil is one of our largest markets.
For completeness on this podcast, I will also cover a market that perhaps is not as actively traded, but certainly one of our markets we cover, and that is Israel. Now, I would say the outcome in Israel is somewhat less surprising from the elections because I think the polls were giving us an indication that it would be a deadlocked outcome, one that would be very hard to build coalitions from. There was still an element of surprise as the polls were saying the opposition bloc would likely come out on top of current Prime Minister Netanyahu's bloc and that did not materialize.
Now, there's a lot of uncertainty. It's obviously a very different situation from Brazil because this is a situation where we need to see the coalition building and there's a lot of moving parts into which a party can cooperate with another party. But for markets, my takeaway is as follows.
We have seen shackles carry reduced substantially. We know that Bank of Israel has been resisting shackle strength. My perception has been that clients have been looking for a trigger perhaps from the elections to still be very constructive on the currency, perhaps some unlocked value there.
With this deadlocked outcome, we really don't know what the eventual coalition will be. That positive catalyst is likely missing and the carry dimension will probably be the dominant factor for the time being. Now, and that brings us to the end of this J.P.
Morgan At Any Rate Emerging Market Focus podcast. Thanks to you, Tanya and Ben, for joining today and thank you all for listening and we hope to have you back again with us for the next one. This communication is provided for information purposes only.
Please refer to J.P. Morgan research reports related to its content for more information including important disclosures. 2026 J.P. Morgan Chase and Company All Rights Reserved.
This episode was recorded on 29th of October 2026.
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