EM Fixed Income: A year of Latam elections
The desk is positioning for a cautious outlook on LatAm fixed income markets as the region approaches a pivotal year of elections. Per the full note from J.P. Morgan, the upcoming electoral cycle is expected to introduce significant volatility, impacting investor sentiment and market dynamics. With no high-impact events on the calendar in the next 30 days, traders should remain vigilant about potential shifts in policy direction as new administrations take shape.
What the desk is arguing
J.P. Morgan analysts highlight that 2025 is a pivotal election year in Latin America, with major votes in Brazil, Argentina, and Mexico likely to drive fixed income volatility. They argue that election outcomes could shift fiscal and monetary policy directions, affecting bond yields and currency stability. The podcast emphasizes the need for investors to assess country-specific risks and positioning ahead of these events.
Where it sits in our coverage
We do not have internal coverage data on the specific currencies or bonds mentioned, so we cannot provide a consensus or firm spread. The commentary is general and forward-looking, focusing on the election cycle rather than current market pricing.
How other firms see it
No other firms are cited in the provided commentary, so we cannot reference specific stances.
Key takeaways
- 01Elections in Brazil, Argentina, and Mexico in 2025 are key events for LatAm fixed income.
- 02Potential policy shifts post-election could affect bond yields and currencies.
- 03Investors should monitor fiscal and monetary policy signals from candidates.
Market implications
Increased volatility in LatAm bond markets ahead of elections, with potential for yield spikes and currency depreciation if election outcomes diverge from market expectations. Conversely, reformist candidates could boost investor confidence.
Risks to this view
Election surprises, policy uncertainty, or escalation of fiscal deficits could lead to sharp sell-offs in local currency bonds and FX. External factors like US interest rate changes may also exacerbate volatility.
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 asset class. I am Aneška Hristová, head of EMEA, EM and LATAM local market strategy here at J.P. Morgan, and I am joined by our LATAM local market strategy team, Tanya Jacob for LATAMFX and Gisela Brand for LATAM Rates.
We also have here Ben Ramsey, head of EM Sovereign Credit Strategy, and Alisa Mayers for EM Corporate Credit Strategy. Tanya, Gisela, Ben and Alisa, thank you for joining me. Hi.
Thank you. Hi, thank you. Hello.
Hi, everyone. In today's discussion, we will focus on the upcoming LATAM election cycle. Normally in this podcast, we discuss a range of issues, but this topic alone deserves an in-depth discussion, as it is likely going to be one of the major drivers for LATAM markets over the next year with every major market except Mexico heading for both.
The calendar now kicks off with general elections in Chile already this weekend and with presidential runoff in mid-December. Next up is Colombia, where the legislative elections happen in March and first round of presidential elections at the end of May. At that time, we will also focus on elections in Peru, where general election is scheduled for April and presidential runoff for early June.
And last but not least, Brazil. Brazil concludes this electoral cycle with elections in October 2026. So really a lot ahead of us for the next year.
Tanya, let's start with you and LATAM effects. In these elections, it appears voters will be choosing between candidates representing quite different parts of the political spectrum. The immediate comparison that comes to mind is the last electoral cycle, which was also very consequential for LATAM markets and offered very similar polarized setup.
How much do you think that comparison or template is valid? And do you draw any lessons from that period? Thank you very much, Ineska.
So yes, ahead of what will likely be a very hectic period of political headlines and political developments, we've done a very comprehensive analysis, quantitative and quantitative analysis of the behavior of FX markets in past political cycles and came up with some relevant conclusions of what to expect this time around. For the region in general, I think that we can highlight our three main takeaways, being first that even though the region remains polarized, as you will say, and that these will likely be an election between opposed economic and political forces, the social fabric is much less tense than what we had in 2021. We are not going through existential processes such as the rewriting of the constitution that Chile was experiencing back in 2021.
And in general, the economic agenda seems more moderate. The institutions in particular have proven to be a very effective offset of executive power, and they have limited the scope for deep political and economic reforms in the countries across the region. And I think that these are very strong differences and mitigating factors that will, in our view, contain the volatility shock of the election outcome.
And it applies to both sides, to a scenario of continuity, but also to a scenario of a transition of government. If you take as a benchmark what we saw in 2021 and 2022, where the currencies in the region depreciated an average of 20 percent post-elections, this time around, I think that the volatility that we'll see and that the moves that we will see after the election will be much more contained. And we are looking probably to less than half of the potential moves for the effects in the region, specifically because of these mitigating factors that we've discussed.
The second conclusion that I think is very much related to the first one is that the risk profile at this point looks symmetric for FX in our view. There are obviously some nuances specific to different currencies based on valuations, but in general, we think that the magnitude of the moves in a scenario of continuity versus one of transition should be similar, with opposite signs, obviously, but that has to do with the level of positioning, which is quite clean for the region in general, with the exception probably of BRL, which is quite long already. The rest of the region does not look vulnerable from a positioning perspective.
And then the third conclusion that I'd like to highlight is that the dollar cycle will matter next year. The stage of the dollar cycle will be relevant to contain or to magnify the effects of the electoral outcomes. Here at the desk, we are still of the view that the reallocation of assets out of still very concentrated dollar positions will continue and that that will provide a favorable setup for EM in general.
We have seen some signals of these already in our flows data and we think that that will be a relevant factor next year with, you know, potentially negative market scenarios being contained by a backdrop of dollar weakness or at least instability. So those would be, Aneshka, the main three takeaways that we've got from our recent analysis on electoral cycles in the region. Thank you, Tania.
That does quite well to transition to LATAM rates. Now let's bring you in, Gisela, and again dwell a bit on the similarities and differences to the last electoral cycle. It seems to me one particular difference is also the local macro setup.
Yes. So in general, we do think that LATAM rates markets are less vulnerable than in the last election cycle. In the last cycle, we saw outside market moves with average gender performance to EM when you measure it from the first round of elections to the post-election trough of close to 200 BIPs.
This time around, we expect a much more contained reaction. And our view behind that is that there are three key differences. We have stronger macroeconomic fundamentals.
We have more appealing valuations, and positioning is not extended. If you go back to the 2021-22 election cycle, it coincided with the post-COVID overheating period, which required tighter monetary policy. We had current account deficits reaching 6% to 7% of GDP in countries like Chile and Colombia.
Real policy rates were negative. Inflation was elevated. If you look at the region now, Chile and Colombia have current account deficits of 2% to 3%.
Peru has a surplus. Real rates are positive. Inflation has moderated.
Even in Colombia, where we have been a little bit more concerned, inflation has been picking up. The environment is much more stable than in 2022. If you look at Brazil, there has been some deterioration in the current account and fiscal deficit.
But the economy is coming out of a hiking cycle. Real rates are much higher, and growth and inflation are moderating. So overall, it's a more resilient macro backdrop.
And then if you look at valuations and positioning, generally, they are not a risk factor either. It is difficult to prove historically whether initial valuations significantly influence subsequent market reactions, but it's reasonable to think that a starting point of relative cheapness likely mitigates the risk of a pronounced sell-off and vice versa. So in this context, if you look at Brazil, Colombia, Chile, they generally appear to be cheap on most metrics.
They are already incorporating some level of risk premium. Peru, I would say, is the one country which screens a little bit expensive in models. When you look at treasury spreads, they are around historical lows.
And at the same time, foreign ownership is close to half of the total stock. So that's a place where we are monitoring the situation where we are a little bit more concerned. But overall, I wouldn't say we are at any extreme point.
Excellent. Now, with these lower risk concerns in mind, would you highlight any of these elections as offering particularly a symmetric risk reward for rates? And in particular, we have Chile this weekend.
Is there something you are watching for this election specifically? Yes. So maybe we started with Chile.
I think the risk reward for bond loans is balanced here. There is a modern election risk premium in the price, but there's not room for very large moves. If you look at past elections in Chile, bond markets have not reacted substantially to any type of result, even in the last election, which was more of a different type of candidate reaching the precedence, more in the extreme.
Even then, we didn't see a big reaction from the bond market. One of the most likely reasons explaining this factor is that the bond market in Chile is mainly dominated by pension funds, which are very long-term investors, and you have relatively low foreign participation. So that naturally reduces the level of volatility in this market.
We are going to be watching for the two candidates that are going to go to the second round. And if you look at different betting odds markets, it seems that CAST should be able to get to the second round, but we have seen some increasing momentum from some other candidates like Kaiser, and that could have some sort of market impact. Overall, we have a positive bias for bonds performance, but we don't expect the most.
Otherwise, in Peru, like we mentioned, we don't think risk-reward is attractive for bonds in terms of valuations, in terms of positioning. This is a low yielder, and it's a country that's fairly accustomed to political risk, but back in 2021, we did see a very pronounced underperformance to AM, close to 200 pips. So we are a little bit more cautious in Peru, and a similar situation we see in Colombia.
I would say Colombia is incorporating significant risk premium, that there is some risk premium in the price, but if you look at the direction of monetary policy, of macroeconomic data, of fiscal policy in particular, we see some risks ahead. So those two countries, Peru and Colombia, we don't like risk-reward at the time. Same question for you, Tania.
For the FX markets, what are you working in Chile for these elections? What's on your mind? And any other risk-rewards that's really screening?
Sure. So for the region in general, we think that with recent history being full of examples of very surprising results versus polling, markets will struggle to price anything much higher than a 60% probability for any given outcome. And the consequence of that is that we'll probably see the bulk of the FX reactions to the elections only after we get some actual results.
And the first tangible signal that we will get is the congressional results. So that's something that I will be looking very closely. My sense is that a divided Congress or a right-leaning Congress would be probably the first positive signal for the markets, and we could see some rallies in the currency starting then more consistently.
For Chile in particular, absent any big surprises, I think that the robustness of the fundamental backdrop for the Chilean peso are there and will transcend the election. So we are a constructive CLP into the election. It still looks cheap in our valuation models, short-term and long-term.
It has lagged Latin American peers. It has lagged its own terms of trade. So I think that once we get this source of uncertainty behind us, it should catch up to the more constructive fundamentals that we see.
Across the region, I would say that we still need more information to really assess the potential for the moves in FX. As a starting point, I would say Brazil, we are looking at positioning, as I mentioned before, closely. It looks quite heavy on the long side for Brazil, so that might be a vulnerability.
It seems like the probabilities for a transition in government are maybe a little bit higher in the pricing for BRL than what we think might really be. But for Brazil, in particular, an analysis showed that the political expectations or the elections are actually a big driver for the currency, only around six months before the election. So probably by the first quarter of next year, we will start to see the currency a little bit more reactive to headlines on the election.
Thank you, Tania. Ben, let's bring you into the discussion here. The electoral cycle should be also very consequential for sovereign credit.
Do you see it as an important driver for next year and where do you think the election outcome can really make a difference for credit markets? Yeah, absolutely. I mean, of course, we always start the year looking at the election calendar.
In the short term, on the sovereign credit side, we're actually looking at some different elections a little bit more in focus than the main markets that you've discussed for local markets. We have a referendum in Ecuador this weekend coinciding with the Chile election and that's a country which has much higher spreads than Chile and probably will garner more interest from the sovereign credit world than perhaps the Chile election. We have Honduras at the end of the month, which is one which is a little bit off the radar but is actually one which has some interesting spreads right now.
Going ahead to next year, I mean, certainly Colombia, certainly Brazil. I think Colombia is the one that's probably the most interesting insofar as spreads right now are as tight as they've been since 2021. When they were this tight, and we're talking about basically 238 is the spread of the Embi Global diversified Colombia sub-index, we were significantly inside of double Bs back then.
Colombia has been trading wide to double Bs since 2022 and was nearly 100 basis points wide a year ago. We've now tightened to about 30 basis points wide of double Bs for Colombia, which I think is kind of pricing in. There's been certainly some technical drivers here.
Buybacks have been an important driver of the spread tightening. I think the market is pretty optimistic that the next government in Colombia will have a more orthodox set of macroeconomic policies and there will be a heavy lift to do given the fiscal widening which has taken place in Colombia. I think we still have an awful lot of uncertainty about even who will be the candidates that could get into a second round.
We could end up with a set of candidates in the second round that don't convey as much seriousness on the type of fiscal adjustment that is required that the market is hoping for. I think that's going to be one to watch. Brazil, much later in the year, we know with a lot of – with a very high degree of probability who one of the candidates is going to be.
I think the market could potentially get optimistic about a more orthodox set of policies, particularly on the fiscal side there, but that will depend very much on the outcome. Thank you, Ben. Finally, Alisa, how do you see Chilean elections impacting on Chilean corporates?
Thanks, Anushka. We generally see the election cycle in Latin America as more of an opportunity than a risk factor for corporates from the region for all those elections that are coming up. But I would say there's not too much focus on next year's elections in corporate valuations at this time just yet.
On Chilean corporates specifically, we think a market-friendly election outcome is already reflected in Chile IG corporate valuations, but there could be some modest incremental compression if market expectations are validated. In addition to some of the factors highlighted by my colleagues here on this call, some specific benefits for this space is copper exposure, which select issuers also benefit from. Now, we do believe that the case for further outperformance would be capped by relatively less attractive valuations currently in Chile IG corporates.
If you look at the trading levels now, we see Sembi Chile IG spreads offering a more modest pickup to the broader corporate IG space than what they have offered historically. The segment is also trading nearly flat to U.S. credit as a result both of the spread compression of the segment and some widening in U.S. high-grade credit more recently. So less of a relative value argument there presently for sure.
That being said, on the more medium term, there could be modest additional compression if a political shift materializes and leads to some re-rating, better investment in consumption climate. This could also benefit Chilean high-yield issuers, which are otherwise generally driven by more idiosyncratic drivers. Thank you.
And with these insights for corporates, that brings us to the end of this JP Morgan At Any Rate Emerging Market Focus podcast. Thank you to Tania, Gisela, Alisa and Ben for joining today and providing these invaluable insights into the electoral cycle. And thank you all for listening.
And we hope to have you back again with us for the next podcast. This communication is provided for information purposes only. Please refer to JP Morgan Research Reports related to its content for more information including important disclosures. 2025 JP Morgan Chase & Company, all rights reserved.
This episode was recorded on 13th of November, 2025. For more information, please visit www.jpmorgan.com.
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