The desk posits a cautious outlook on the emerging markets (EM) fixed income landscape as investor sentiment wavers amid recent monetary policy communications and inflationary pressures. Per the full note source, key market participants are grappling with the implications of central bank rate adjustments, which may stifle capital flow into riskier assets like EM bonds. Moreover, a shift in global risk appetite is reflected in recent performance metrics, suggesting a potential slowdown in demand for EM debt instruments amidst tightening financial conditions. The absence of significant upcoming economic events further complicates positioning for traders seeking guidance on market direction.
What the desk is arguing
The desk frames this as a pivotal moment for EM fixed income, indicating that recent market volatility could catalyze broader concerns about credit risk in these emerging sectors. This hesitance is underscored by various metrics indicating investor caution, such as widening credit spreads and declining liquidity in EM bond markets.
Recent data suggest that global inflation metrics remain stubbornly high, calling into question the commitment of central banks to stabilize rates without adverse effects on economic growth. Specifically, the EM fixed income sector must navigate the headwinds of rising interest rates, which, as highlighted by J.P. Morgan, have made credit less attractive.
Where it sits in our coverage
While we lack specific internal targets for the EM fixed income space, other firms are projecting varying outcomes. For instance, jpmorgan anticipates a target of 1.10 in the March 2026 tenor, whereas bofa offers a more conservative outlook at 1.04 for the same period.
This perspective reflects the divergence in expectations across the board; the desk's cautious stance aligns closely with jpmorgan's forecasts, positioned at the higher end of the anticipated spectrum.
How other firms see it
On the optimistic side, firms like jpmorgan maintain a bullish view on selected EM fixed income, while bofa presents a bearish outlook, cautioning against rising defaults as a potential risk factor. This contrast highlights differing evaluations of creditworthiness across various EM regions.
Key indicators to monitor include movements in the USD/BRL pair and communications from the Federal Reserve, which may inform global trends and impact the broader EM fixed income outlook.
01Caution prevails in the EM fixed income sector amid monetary policy shifts.
02Investor sentiment is sensitive to inflation and rate adjustments from central banks.
03Credit spreads are widening, indicating heightened risk perceptions.
04Diverging forecasts among firms highlight the uncertainty surrounding EM stability.
Market implications
Traders should closely monitor key resistance levels around 1.10 for EM fixed income trends. Any signs from the Fed regarding rate trajectory may serve as critical signals for positioning ahead.
Risks to this view
A key risk to this cautious outlook would be a significant pivot by central banks towards more dovish stances, potentially reigniting demand for EM bonds and reversing current trends. Additionally, geopolitical stability could also dramatically alter investor appetite for this asset class.
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 Kristulová, 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 Mike Harrison, our Senior EMEA EM Rate Strategist, both at J.P. Morgan. Ben, Mike, thanks for joining.
Aneška, hi, how are you? Hi, Aneška, thanks for having me. So we have seen now a substantial further pressure in energy prices over the past week.
Obviously, on this podcast, we have been discussing the renewed escalation in the Middle East, but it is clear that pressures have now increased. We had oil prices hit 100 per barrel today. Just want to highlight that for us in EMEA EM region, gas prices are also very important.
European gas prices have now hit about EUR 62 per megawatt hour. Oil prices, one could judge they are still middle of the range as compared to the first escalation between the March-April-May period, whereas gas prices are actually at top of the ranges since the war has started. So that's a new source of pressure for some in the EMEA EM region.
To make matters even more precarious through this period, U.S. real yields, or in general, U.S. yields are pushing higher. We have now U.S. 10-year yields at new highs since 2023, and that is about 240. And on the ground, we have to admit that there has been a new source of escalation compared to the first round of the war, and that is that the Houthis are now threatening the Bab-el-Mandem Straits.
And I think what is also notable compared to what we have been discussing here on this podcast is that compared to the pattern, we all are now prone to expect the escalate to de-escalate. We have seen remarkably few headlines around any sort of negotiation happening, ceasefire proposals. These sort of headlines have been rather rare.
They occasionally do hit, but they have been rather rare. And I think a reasonable conclusion from that is that neither party here perhaps feels it has created enough leverage for those negotiations to happen. Now, with that in mind, let's start with you, Mike.
The rates market, I think, has been under relatively more pressure than the FX market or the credit market. I think in this podcast today, we'll take it by order of pressure. So you go first.
So can you describe for us the market price action since oil prices turned higher in early July? Which markets are underperforming, which are proving more resilient? And in your own mind, would you be able to distinguish for us how much the hawkish fat has mattered versus the renewed energy price pressures?
Sure. Thanks, Ineska. Not an easy market to be a strategist and definitely not an easy market to be a rate strategist, but I'll try to give my two cents.
Well, I guess the first observation, without sounding pretty obvious, is that with the oil prices and gas prices moving sharply higher, rates are higher across EM and DM, months to date. A couple of interesting trends, though. One would be that this has generally come with a little bit of steepening across the board, not necessarily very large steepening, but you're seeing that in some of the high yields a little bit now.
When I look at underperformers and outperformers, if I take shorter dated rates, what's quite interesting is a lot of the underperformers have been more the lower yielding names, so some of the CE candidates, Israel, and in DM world, it's been Euro rates, Sterling rates, Swedish rates, et cetera. And I think that's quite interesting because in my mind, that points to the idea that some of this rate selloff has been driven by this view that there's still a pro cyclical backdrop. We've had high oil prices, but some of the growth data that's coming in is actually looking quite strong too, and the capex continues to pick up, et cetera.
So some of this move higher, I think, is just a repricing of rates in a higher growth world that would necessitate higher rates. I think what's interesting now is that you're starting to see some of the high yielders underperform a little bit. South Africa rates today, for example, and I think we might be reaching a bit of a tipping point where at these high oil prices, when risk appetite starts to get kind of hurt a bit, some of the high yielding, high beta rates markets start to feel the pressure a bit more.
Generally, these have been the candidates that have seen steepening over the last month or so. In terms of outperformers, what I think is interesting is, and relates to your question about how much is to do with US rates and the Fed and how much is to do with energy prices, US rates actually aren't that much higher month to date. So you have US rates and Asian rates have generally been the outperformers, and I think to some extent in Asia, that reflects the fact that a lot of hikes had already been priced in, and also that's probably the region in EM that's most sensitive to Fed developments.
So I think what has happened is that the kind of hawkish Fed repricing was sort of the first big move that had already been happening. Pre-war we were pricing Fed cuts, that's moved sharply higher. Real rates have moved sharply higher in the US.
So I think that first big move has already happened. And the softer US CPI, which feels like a lifetime ago now, kind of really took some of the sting out of the hawkish Fed pricing. So I think to that extent, the moves that we've seen in EM rates most recently hasn't really been to do with the Fed.
To my mind, it's all about the energy prices moving a lot higher. And I think it's energy prices moving higher combined with a lot of uncertainty about how this resolves. So I think at this point, it's difficult.
I think when you combine that with stops that are going through, I think that's certainly been accelerating the last couple of days, especially in some of the more kind of consensus longs that we've seen in our franchise. It's making for a tricky rates environment for sure. Yes, I think you've described it really well.
It is a tricky environment. And that actually really nicely leads me to my next question. In this difficult world, would you be able for us to highlight a few key idiosyncratic stories that stand out to you?
Bearish or bullish? Well, I've been a bit bearish in my last segment. So let me start with something a bit more bullish.
I think Colombia has stood out as one of the more positive idiosyncratic stories into and after elections there. I think from the rates perspective, the most interesting angles are about fiscal consolidation, the return of foreign inflows, a relatively clean starting point. There's been a decent rally there already.
So I think to generate kind of the final leg of the election bond driven rally, we're probably going to need to see some actual policy announcements. And we probably have to wait a little while for that until the president elect comes into office on 7th of August. But it's certainly stands out as an interesting idiosyncratic story.
It has all kind of the hallmarks of something bullish, right? Like a regime change, rates that had got cheap into the event, like a macro catalyst in terms of fiscal consolidation. I guess the difficulty there, like with all the stories that I can talk about, is that they have good idiosyncratic anchors, but it's balancing the risk environment.
And it's Colombia that benefits as a bit of an oil exporter. So that's somewhat unique compared to some of the other high yielders in our regions. So Colombia is one story for sure.
In EMEA, I'll kind of bunch two stories a bit together. South Africa and Hungary are probably two of the markets that we've seen as having relatively bullish idiosyncratic kind of medium term trends. South Africa, I think, is very topical at the moment.
We've just had the Saab today who were on hold, which is in contrast to market pricing for a hike. We're seeing a bit of rates set off there with some curve steepening. So again, that's a market where if you take a step back and you look at pre-war is one of our top picks.
It has a bullish fiscal trajectory. The structural growth reforms are coming through. But the anchor of a lot of the story was a hawkish Saab.
And so I think the market is questioning a bit now how much further they have to run. So that's a story that's changing a little bit there. And the dynamics are interesting to keep a hold of.
I think Hungary too. Hungary's really enjoyed its time under the sun as this post-election regime shift sort of changed in the same way that Colombia has been benefiting from this positive election shift. Hungary's had these anchors of euro recession, and that's seen the rates trade very well in recent months.
But kind of like the Saab story I just described, it's an idiosyncratic story that's running into some external headwinds in terms of high oil and gas prices. And within EMEA, Hungary is the biggest importer of these commodities. But it's also running into a little bit of a dovish central bank.
And the market is looking for a bit of reassurance that the central bank would be a bit more hawkish at the last meeting. It didn't really get that. You know, I think that's a market where people have been quite bullishly positioned as well.
So it's interesting. There are these idiosyncratic stories, but they're all facing slightly different challenges. Central bank's not being hawkish enough in the EMEA region.
In Colombia, we've had a chunk of the rally already, and we're kind of waiting for the next catalyst. So when I take a step back, EM has a lot of good things under the hood. But they probably will be taking a backseat to the external environment for now.
Perhaps this is a good time to pivot to you and, dare I say, bring some positivity into the conversation. You know, can you outline to us a bit how the EMFX market has been trading on the renewed escalation in the Middle East? And from your perspective, what are the most interesting stories that you're watching right now?
Compared to local rates, I would say the EMFX market has been showing a bit of resilience. Partially that's also related to the fact that local rates rallied a little bit more on the ceasefire, whereas the EMFX didn't. So we have less of a rally to reverse.
I think one key aspect of that is that we continue to see across a number of metrics very little positioning in the asset class. So as the situation in the Middle East has started to escalate again, there's just fewer positioning to squeeze out of the market. Now, differentiation is still a very, very important aspect for the FX market across the carry dimension primarily.
But it's actually starting to see another point of differentiation. So let me elaborate a little bit on that. So if we look at the performance of different currencies, since oil started to go up again, the carry dimension definitely dominates.
We are again seeing a lot of FX outperform. That's the highest yielding region and Asia generally underperform. But a new aspect here is actually that EMEA EM, the kind of mid-yielding region in between Asia and LATAM, is starting to show some wobbles.
And when we look at those wobbles, they're very much related to central bank stances. So it looks like we have now reached a point where the mid-yield space really relies on whether the central banks are turning hawkish or dovish, and it's becoming a key dimension of differentiation. Now, in terms of the stories, they will be a little bit related to exactly what I've said right now.
So you highlighted some very idiosyncratic stories, and certainly they are quite similar in the FX space because they're usually driven by a reform agenda. I would say in LATAM, Colombia in FX stands out the most. I would even venture to say that at this moment for me, the FX trade in Colombia is better positioned to withstand the external pressure than even the rates market.
In the EMEA EM region, the stories definitely align along the dimension of whether the central banks are turning hawkish or dovish. That's clearly playing out in the price action. But there is one market I want to highlight where I think the price action does not align with fundamentals.
I think we are going in a completely different direction than the fundamentals justify, and that's actually Israel, which has recently traded primarily based on the central bank dovish shift, as well as the setback in the AI theme and AI equity prices. When we actually look on the ground, what the data are showing us, it's a meaningful pickup in FDI. Basic balance is staying really strong.
We are noticing stronger funding routes for startups. So I think that's an interesting currency where perhaps the market is trading one theme, but actually we see the developments on the ground, the growth developments and the balance of payments development as not justifying that direction. With that, let's now bring you back into the discussion.
As I said, we went in the order of the markets that are showing most vulnerability to the market that I believe is showing the least vulnerability. But you may correct me on that. Question for you really is what would it take for credit spreads to Biden or show any wobble?
That's the first question. And I wanted to hear from you if the US real yields themselves are a problem for you, if that is actually a big part of what you're worried about. Thanks, Aneska.
Yeah, as you said, I think we've been somewhat immune to the renewed market pressure that we've been seeing. We look at spreads on EM credit, both sovereigns and corporates. We're basically seeing us kind of flatlined over the last, really over the last two months.
So just the last, you know, the latest sort of intersection point, I guess, is the risk environment as we're perceiving it with oil prices getting higher and the Iran conflict again hasn't put a lot of pressure on spreads. What we've observed is something we talked about last week is the EM credit, both sovereigns and especially corporates have been outperforming US investment grade counterparts. And that's the technical discussion.
And, you know, what would it take for us to be concerned here? I think it's going to be something which is like pointing to the end of a cycle, something that would be putting a wobble in, you know, concerns on global activity, something that would more meaningfully put a shock into equity valuations. And I don't think it's real rights itself.
So we've in our own recent publications actually took a look at US oil rates and other episodes where US rates have trended higher and sort of been making new highs. And again, as long as that part of that is being underpinned by activity and it's not sort of inflation expectations, a combination of activity and a more vigilant Fed, more vigilant central banks, that's, you know, pushes yields up higher, but it keeps spreads kind of stable. And I think that in that environment, again, with the cycle still feeling like it's strong, investors are interested in all in yields and it keeps us pretty well.
It keeps us held in pretty well in terms of credit markets. You know, I would note that as both yields and, you know, spreads and yields move higher, at some point we have to be at least conscious of what that means for refinancing needs. If we look at the single B segment of the global diversified in terms of yields, we are about, you know, coming up on about 60 basis points off the recent local low, and we're above 8% for the first time.
You know, we touched that back in May, but really since sort of the March pressure that we saw in markets. And so I think that's something to take note of. It means that sort of the lower rated, higher yielding segment of the asset class will face a bit more challenge in terms of coming to market.
Doesn't seem at all prohibitive. I mean, we've seen Pakistan come back to market just in the last weeks. And, you know, if we think that basically over the last six months or so, the average has been eight and a half in terms of that yield.
So we're still well below that average. And, you know, it's really sort of when we get above 9% and approach 10% in this metric, I'm talking about single B yields that we would get a bit, I think, more concerned. So it's still a pretty comfortable place.
So perhaps your asset class is the one to look for, you know, outstanding, constructive story, the ones that we don't even have to watch what the oil prices are doing daily. So, you know, I'll leave that to you to highlight to us if there's anything of that, you know, idiosyncratic value that you're talking about. Yeah, for sure.
You know, I think when we talk about idiosyncratic stories, as Mike was alluding to before, often politics and we in the credit space are also constructive on Columbia. I think more at this point, from a carry's perspective, it's trading like a double B. That's probably where it's going to consolidate.
After the results of this election, there was a risk that it could have, you know, been in a credit downgrade cycle. I think where we would focus, you know, kind of remains on politics. Still, Romania is certainly one where the politics has been, you know, hard to pin down and has been problematic for markets.
And I think that does put some value in credit spreads. If we get a scenario where we can kind of avoid snap elections or a government which comes in, which once again, which puts some risk in terms of, I guess, a confrontational tone with the EU and the West, that remains to be seen. But that's one where we think that that political dynamic will be setting the tone.
You asked me for constructive. I think the one where we're actually more cautious but idiosyncratic would be Brazil, given its election cycle coming up over the next three months. And I think, as we've mentioned on this podcast, we will have probably intense scrutiny over that election.
And at this point, it looks like we're leaning towards a continuity scenario, which is one which I think makes markets a little bit worried about fiscal debt dynamics. And that, we think, can, you know, as we have more intense scrutiny on this, probably put some idiosyncratic pressure on Brazil spreads. That said, I don't think we're sort of existentially worried about Brazil as a sovereign credit.
It's a strong credit overall in terms of its balance sheet, in terms of robust balance of payments dynamics. And, you know, if we do get that weakness through the election cycle, we may be looking to turn more constructive at the end of that cycle. Certainly, Argentina is one which is always idiosyncratic.
And at the end of the day, even though the sort of fundamental picture has been quite improved, it's still trading a bit wide to other peers in its rating category, which is single B. And I think looking ahead to the 2027 election is going to be the main factor there, which determines whether or not Argentina can continue on a constructive path in terms of spread tightening. And eventually, we think with open market access.
Finally, maybe the most idiosyncratic of them all, which not to say it's immune to oil prices, but that's Venezuela, where we just had a tragic earthquake. We had been expecting Venezuela's financial advisors to announce a debt sustainability BSA and a restructuring proposal. That looks like it's still in the works.
But there we kind of have a lack of underlying data. The IMF is not involved. So I think we have a lot of information that's going to be delivered at once to the market, both in terms of what the economy and the recovery looks like in the eyes of the authorities and how they translate that into debt restructuring.
So that's, you know, perhaps the most idiosyncratic of them all in our space. Yes, you mentioned actually quite a lot of countries, and I'm glad for that. It looks like you have a lot more idiosyncratic stories than us in the local rates and FX space.
And that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast. Thank 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.
Please refer to J.P. Morgan research reports related to its content for more information, including important disclosures. 2026 J.P. Morgan Chase & Company All Rights Reserved.