EM Fixed Income: Assessing EM amid the global repricing of rates

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'm Aneška Hrystulová, Head of EMEA EM and LATAM Local Market Strategy here at J.P. Morgan.

And I'm joined today by Ben Ramsey, Head of EM Sovereign Credit Strategy, and Mike Harrison, our Senior EMEA EM Strategist, both at J.P. Morgan. Ben, Mike, thanks for joining.

Hi, Aneška. Hi, guys. Pleasure to be here.

So another week of almost disruption has again passed. We are now in the 12th week of the conflict. We learned that President Trump was very close to ordering a renewed military action against Iran earlier this week, but he called it off.

And negotiations on the deal are ongoing with various headlines emerging. Meanwhile, after a string of upside surprises in U.S. inflation and inflation also elsewhere in the world, inflation has simply become a key focus for markets. U.S. rates are now pricing over 70 percent chance of a hike by the Fed by year end.

And today we saw Bank Indonesia surprised with a 50 basis point hike. So in this podcast, we will discuss how is the underlying market spectrum developing with a special focus on the repricing in rates. So let's start with you, Aneška.

We've been obviously talking about this now week after week, but it doesn't mean that it's not important. Let's set the scene here in terms of the backdrop with the Middle East developments, what's going on with oil prices and how this is changing your underlying bias when it comes to EM local markets. Right.

So in terms of Middle East developments and oil prices, I would venture to say that actually at this moment, we are tracking relatively close to what we have been expecting as a base case. And that's that's a tough statement to make, considering it's such an uncertain development. But basically, our base case here has been for several weeks that we are simply in a protracted phase of negotiations, stalemate.

And in that phase, it's likely that oil prices stay relatively high, but do not break out of kind of unstable ranges to the upside. I would say we are still probably in that same phase here. A lot is happening on the ground.

We have two tails to consider against that. The first tail is obviously the negative tail of a renewed military action. And after the headlines that we heard this week, we cannot completely dismiss it.

But it is certainly very interesting that U.S. GCC allies have pushed U.S. against that path. So we cannot exclude it, but certainly the developments this week have been more into the other tail.

And the other tail is one that we perhaps have some basis for negotiations, a deal. I found it quite interesting that the headlines this week have not focused particularly heavily in the deal negotiations about reopening the Strait or how the Strait would be managed. They have focused more heavily on the question of enriched uranium.

And we have heard that possibly based on the public reporting, the U.S. has offered to unfreeze 25 percent of Iran assets. Some headlines also reporting that Iran has discussed diluting some of the uranium or transferring it to Russia. Now, that's still not a deal.

It still seems that the parties are very far apart. But certainly developments are happening on this front as well. Our base case of a protracted negotiation, considering how difficult these issues are, I think it's still probably the right base case.

I would also say that even if we see a deal considering the issue of the Strait has not come heavily in headlines this week, the traffic through the Strait is probably something that remains affected for a protracted period of time. In our own tracking, we saw four VLCCs pass in recent days from various countries. So that's an encouraging sign.

But it still remains much below the usual traffic. So now I would say that the assumptions here on oil prices staying high but not breaking out of ranges on the upside is probably in the right range. The other assumption that we've had is one of a reflationary backdrop for global markets.

And again, I would say that that's tracking rather well. We have seen further upside surprises in inflation in a lot of countries. Our economists over the past month have revised inflation up in about 60% of the EM countries that we cover and down only in about 10%.

And in magnitude terms, the upside revisions have been a lot larger than the downside revision. In growth terms, it's been a lot more stable. Our EM forecast revision in the index that tracks growth has been about stable with maybe over the past month, 50% of countries being revised down and about 40% of countries being revised up with the net effect of those being roughly stable.

So I think the reflationary assumption is also roughly correct. So where that leaves us is an environment where a reflation is the underlying base case, uncertainty is very high. We have a preference in that environment for high yielders over low yielders, for oil exporters versus oil importers.

So I think that that's where we are. Now in terms of what has been more surprising for us, and it's not tracking as close to our initial assumptions, that is the sharper repricing of the Fed that we've seen over the past week. That's what deserves more of our attention on this call.

And I'm very glad we have Mike here to help us unravel a bit more how rates have repriced in the U.S. and especially what are the implications for emerging market rates. Yeah, that's an excellent segue to you, Mike. Has anything stood out to you in the recent repricings in terms of the rates curves?

And yeah, of course, how are your views evolving here in this dynamic situation? Sure. Thanks, Ben.

Thanks, Ineska. Great to be back on this week. So EM rates have continued, they're much higher alongside U.S. rates over the past week.

That said, the EM rates have largely outperformed for the most part, bullish idiosyncratic stories continuing to shine through in places like Hungary and Israel. The underperformers in EM generally have been in high yielders like Colombia, Mexico and South Africa. So what's going on?

Put simply, to me, this feels like a classic EM rates replacement repricing. So like Ineska was talking about, we've had higher oil prices and inflationary risks are growing. That's combining with growth, which is holding up pretty well.

In combination, this is driving the market to price a series of EM central bank hikes. This has been compounded by the fact that a lot of EM central banks have yet to actually deliver their first hikes, so the anticipation is building ahead of first moves. Our economists forecast have generally been moving in this direction of adding hikes or removing cuts.

We have further hikes penciled in in places like South Africa, Indonesia and Peru, cuts removed or reduced in Romania, Turkey and Brazil, for example. So I think what's interesting to me as well isn't just the fact that rates have moved higher. That seems like a fairly obvious result of the higher inflation expectations, but it's the rates curves move as well.

So if you look at 510's EM bonds curves, over the last week, they're largely either unchanged or flatter. To me, that points to monetary policy-driven rates moves rather than accelerating fiscal concerns. You've seen the same sort of price action in the US curve, for example.

If the concerns were that EM fiscal was really deteriorating sharply from here, that should have been associated with larger long-end steepening of EM curves, and we haven't seen that. So that's what's happened, but I guess the value-add is what's going to happen, and the key questions I've been getting this week have been some sort of variation of what do we do now in EM rates. EM rates feel like they're caught between a bit of a rock and a hard place.

On the one hand, the risks that I've been describing that have been driving rates higher are likely to linger so long as the conflict persists. On the other hand, these risks may linger, but they're much better priced. So taking a strong view in either direction can feel a bit risky, and that's one of the motivations why our top-down view in EM rates has been relatively neutral.

I would point to three observations to consider, though, when thinking about the EM rates view going forward. The first would be that the type of US rates moves matter for EM still. So this sell-off has been typified by higher US real yields rather than higher US break-even inflation.

This is the most damaging type of sell-off for EM rates as global financial conditions tighten. So if US real yields stay under upward pressure, that could come if a more hawkish Fed continues to be repriced, I would say that's a relatively bearish signal for EM rates or less equal, and it will be hard for EM to completely decouple. That's point one.

Point two would be that there can be some separation of EM rates performance here. I think if you divide it up between proactive central banks and reactive central banks. So the market is pricing hikes, but actual delivery of these hikes, I think, would be quite beneficial.

It would show that central banks are trying to anchor inflation expectations and that they should be able to generate this with some sort of soft landing rather than having to hike so sharply into inflation that it generates a harder landing. So I think that's just a distinction. Probably the rates markets of proactive central banks outperform those of reactive central banks.

Another third point, thinking forward, is to try and think about what sort of structures give you asymmetry and what are the idiosyncratic stories out there. For example, positive carry role front-end steepeners, where central banks can be slow to the hiking party, or relative value expressions versus core rates that insulate the global rates environment and capture country alpha. These are the sort of trades that we've been recommending across regions.

We still also see good room for inflation-linked rates products in nominal portfolios too. So to sum it up, it's not easy. It's never easy in EM, but I think EM rates broadly at this stage, we probably need to be trading them a bit more defensively, but there's still room for the idiosyncratic stories to outperform from here.

Thanks Mike. So maybe to wrap up with local markets, Ineska, do you see cross implications for the FX backdrop from the rates repricing that Mike's described? Well I think what we've seen in EMFX, so normally when we have a very fast repricing of the Fed, a lot of the correlations center on that repricing.

So if we are in a week where suddenly you get additional hike pricing for the Fed, it's natural to see all the correlations center on that and EMFX underperform. But I suspect that this is not a lasting reaction. The lasting reaction that we normally see in EMFX really comes down to U.S. real yield outlook, and especially how does that real yield outlook compare to the real yield outlook that we can expect in EMFX, considering as Mike mentioned, in a lot of the EM universe, we are also expecting hikes, and in many cases we are expecting more proactive central banks than the Fed.

So my personal expectation is that after, you know, hopefully we soon come down in terms of the pace of pricing for the Fed, and then we can start focusing really on those interest rate differentials. There we still have a bit to learn about truly how proactive or behind the curve Fed will be with the new check, but my personal expectation remains that actually EM central banks have here on average the edge of being proactive, and therefore that interest rate differentials can actually work in many cases in EM favor. Now it's a view that works well with the reflationary backdrop that I've mentioned in EM, growth staying strong or resilient, and inflation adding pressures for central banks.

I think that view is the correct one, but obviously as we are dealing with a lot of Middle East uncertainty, a lot of uncertainty on the underlying developments, we are quite cautious in how we would express it and where we express it, but as I mentioned at the start, high yielders versus low yielders is probably one safer way of looking at that. Now with that, let's turn to credit markets, which continue to trade very tight. Any of the recent developments, including the Fed repricing that we discussed, or developments on the ground in the Middle East changing your bias?

Yeah, I think we're sort of steady state here in terms of the Middle East, as you've described it at the top of the call. I mean, I think we really need to see some type of breakthrough, and I think risk markets, including credit markets and EM sovereign markets are cognizant of the fact that there could well be some type of deal, some type of resolution that will sort of validate what has been still pretty robust tone for risk markets and for sovereign spread markets, and I think that in that context, definitely more attention has been paid to this rate, the repricing of U.S. rates, and rates, I'd say, broadly. But if we look at spreads in particular, as you mentioned, we've really still been sort of in a tight range.

We had reached the year-to-date and really almost decade-to-date heights of spreads in early February for the MB Global Diversified ahead of all of this, so we were at 241. We basically widened about 50 basis points to the end of March with all the real pressure of the conflict, and then we came back through that 241 and got to heights of about 234, so really it's extremely tight level since then, which has basically been two weeks ago since we've seen this repricing. We've only seen spreads widen about eight basis points, so kind of in the middle of like a pretty tight 15 basis point range that we've seen over the last month.

That said, the yield on the MB Global Diversified, which had gotten as low as 678, has now moved all the way up, basically about 40-45 basis points higher. I think we're starting to get to a level of yields, which is at least raising eyebrows, particularly for the high yielders. It's not by any means a level of sort of all-in yields, which is starting to price sovereigns and sort of the higher yielding, more risky sovereigns out of markets.

We're still some 50-75 basis points in this all-in yield terms below where we were in the second half of 24 before Liberation Day, but when we started to really see a more robust return to markets for, say, single B issuers, which is something that's really continued through the course of 25 and into this year. So if we're starting to think about the cost of refinancing leading to issues of repayment risks, I don't think we're there yet. Spreads are just still tight enough to offset that move higher in yields.

So again, it's really going to be if we get that sort of second derivative of the pricing in of the Fed moving, the Fed actually moving, and then concern about sort of global recession coming back into the picture, whether it be from high oil prices having an impact or tighter financial conditions, that I think we're going to see spread moves. In the meantime, I think we're just kind of stuck in this pretty tight range. Again, higher yields will start to raise concerns about refinancing risk, but I think we're still pretty far away from levels that would be too problematic.

And Ben, one more question to you that has come out of client conversations this week. Would you think that strong technicals have also played a role recently to keep spreads tight? And what would you expect?

Would you expect a strong technical support to continue? Yeah, I think we definitely, you know, it's hard currency along with local markets have seen a real inflection point in terms of inflows ever since Liberation Day last year. If you look at the big picture in terms of that trajectory of inflows coming back after multiple years of outflows, yeah, we had a pretty decent drawdown in the course of March and into the beginning of April.

But it's been completely, almost completely retraced now in the last, over the course of the last month, over the course of the last six weeks. So we're back to a pretty strong inflow dynamic. And I think that that helps, you know, obviously it helps in terms of keeping spreads tight.

We've seen very strong issuance from sovereigns and again, to the point I was making before, we still see higher yielding, lower rated sovereigns tapping the market. Deals have been, you know, well subscribed. So the sense that there's money to put to work, a function I think of the better technical position in terms of the inflows.

I think if we look at more broadly the credit world, you know, if we look over a multi-year horizon and particularly these years when we saw outflows, it's likely that private credit was, and we have evidence that private credit was seeing massive inflows. So to some degree eating the lunch of EM, you know, I think insofar as there's been more scrutiny over what's going on in private credit, you know, certainly money doesn't come out of those markets as easily. But in terms of the incremental dollars, which may be in the past have been headed to private credit.

I think that that's probably some technical tailwind to EM hard currency to spread product in EM. And I think that that's maybe a structural shift, which is also helping to underpin what is a trajectory of, it looks like, you know, ongoing inflows despite clearly some volatility when we have external shocks like the one we've seen with Iran. Thanks, Ben.

And that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Mike 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.

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This episode was recorded on 20th of May, 2026.