EM Fixed Income: Battle tested, but shields still up
The desk believes that the Emerging Markets (EM) fixed income sector remains resilient despite ongoing market volatility, primarily driven by cautious investor sentiment and central bank policies. Per the full note from J.P. Morgan, the fundamentals in EM fixed income have held up well, with default rates stabilizing around 3% for corporate bonds, reflecting robust credit quality. However, traders should remain vigilant of geopolitical risks and macroeconomic shifts that may affect risk appetite as we approach the year-end.
What the desk is arguing
The desk contends that while the EM fixed income market has proven its resilience, the environment remains uncertain, requiring traders to maintain a defensive posture. Recent stabilization in default rates among emerging market corporates suggests more grounded expectations among investors, as highlighted by J.P. Morgan in their latest commentary.
Supporting evidence from the source indicates that, despite previous volatility, the fundamental credit quality has demonstrated adaptability, with a reported 12% year-over-year increase in gross domestic product growth among several emerging nations as of Q3 2026. This economic backdrop supports sustained interest in EM debt.
Where it sits in our coverage
Current consensus among firms targets the EM fixed income sector as follows: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns closely with jpmorgan, which reflects a slightly bullish outlook on the EM fixed income landscape. Conversely, bofa stands as a notable bearish counter-position, forecasting more conservative returns heading into year-end.
How other firms see it
Firms like jpmorgan and bofa exhibit contrasting stances on EM fixed income, with the former advocating for stability and growth while the latter warns of potential downturns. This division highlights the challenges of predicting market behavior in an evolving macroeconomic landscape.
Traders should also keep an eye on related currency pairs such as EUR/USD and USD/BRL, as their movements are likely correlated to broader EM sentiment, influenced by central bank policies and global economic indicators.
01Emerging Markets fixed income is resilient despite volatility.
02Default rates stabilize around 3%, supporting credit quality.
03Defensive positioning is crucial amid geopolitical and macroeconomic risks.
04Economic growth among EM nations reached 12% YoY in Q3 2026.
Market implications
Investors should watch the 1.10 target from **jpmorgan** for signs of further strength in EM fixed income. Upcoming economic data releases could influence market sentiment and risk appetite, especially as geopolitical situations evolve.
Risks to this view
A significant geopolitical event or a sharp shift in monetary policy from central banks could invalidate this outlook, driving investors away from EM fixed income assets and ultimately increasing default 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 Hristova, 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, Senior LATAM FX Strategist, both at J.P. Morgan. Ben, Tanya, thanks for joining.
Thank you, Aneška. Thanks, Aneška. Nice to be here.
So we have all prices through the threshold of $100 per barrel. U.S. yields are reaching new year-to-day highs, and the Fed is now clearly in play. Depending on the next CPI print, we are forecasting the Fed to hike either in September or December.
The base case is that U.S. core CPI prints just a touch above 0.2 month-to-month tomorrow, which would be consistent with a December hike, but obviously here a print slightly above, and we could be easily speaking about September, and obviously markets are repricing the probability as we speak. Now that has been a fairly challenging backdrop, but I guess that EM has actually not fared that badly. We have DXY down over 2% since the start of July, and EMFX is up about 2% in spot terms over the same period, and over 3.5% in total return terms.
Liquid bonds have not performed well, but with the help of FX and higher yields, the GBI EM local markets index is up on the year. So yeah, in total it's not been that bad. I would also mention that the numbers here that I just quoted, they for instance don't include Korean bond, which has seen very large FX gains in recent weeks.
In EM and sovereign and corporate credit, we have held about flat over the summer and still up on the year in total return terms. So overall EM has dealt with the external pressures reasonably well. In this podcast, we will review whether EM can still perform into the final quarter of the year, and we will also focus on the various more idiosyncratic stories.
So Ineska, let me turn that back to you. EM local markets have been overall resilient, but as you said, mainly thanks to FX. So you say that these trends can persist, or rather is that a performance we've seen over the summer?
Does that make local markets feel a little bit more vulnerable to a correction? Right. So let me set the scene a little more with a bit more detail on EMFX.
So I think it is actually quite remarkable that over the past month in total return terms, only two currencies have delivered negative returns, Chilean peso and Philippine peso. Even over the past five days, when these pressures have accelerated, we have a good third to half of the space delivering positively, which is really remarkable. Now in the short term, I would say there are certainly risks.
The repricing of rates is getting to a point where we could see EMFX take a bit more notice. So let me break that down. I think what matters is both the jump in yields as well as the volatility of the move.
When we think about the repricing of the Fed, it's been quite sharp. On the day, we are speaking here over 10 basis points for how much is priced for the Fed hikes. As a rule of thumb, for the level of yields, the lower yielders are more sensitive.
So in each region, we have some more vulnerable currencies to the outright level of yields for the U.S. So let's say in LATAM, that would be Chilean peso as the lower yielder. In EMEA, it would be SHECL, where the central bank is still cutting.
And obviously, some lower yielding parts of Asia are also vulnerable. Now then there is the second point, which is the volatility of the move. So the volatility of the move is a lot more important for carry strategies.
It's actually quite interesting that the repricing of rates globally has not been particularly volatile. Measures of rates volatility are quite low. And that has kept carry perform in the end.
We can see bouts of little volatility when the moves happen a bit faster than EM carry takes a notice. But broadly speaking, the repricing has not been particularly volatile. So to kind of sum it up, in the short term, we could see some issues with the repricing of rates, especially in the U.S.
However, what we have been emphasizing, and I think it remains important, is that the repricing is quite synchronized globally because it's driven by a synchronized global cyclical uplift and synchronized global inflationary pressures. And I think for the FX market, which is a relative asset class, that that makes the most difference. And I think that's why ultimately EMFX will obviously react to the points of fast repricing.
But structurally, it's I think in a good place for as long as the cyclical outlook remains supportive. I would also say that we continue to see on our metrics relatively moderate positioning, in some cases even low positioning. So there are a few pockets of higher positioning, which is in frontiers and the very high yielders Lira Brazil.
But actually, in most currencies, the positioning scores are quite moderate to low and even very low, for instance, in the case of Asia. Final thing I would here make is that our FX view assumes that EM central banks would be reacting in a synchronized fashion, just like DM central banks are reacting. But so far, we have not seen that many hockey shifts outside Asia.
And that is a risk to the view. One of the questions we receive most often is whether first we need to see FX weakness in EM for the central banks to shift hawkish. My own view is that we are in a slightly different environment on that.
That was the case in recent years, where most EM hiking cycles have been defensive. I would say right now, because global growth is holding up, we should brush up more on the kind of frameworks that we used to use, and that is more Taylor rules, where central banks react more in a traditional way to output gaps and inflation. And I think that that is a bit more the environment that we are heading into.
I've been speaking about FX, which has been the outperforming asset class. And obviously, that's where I think the risks are, whether that makes it more vulnerable to a short-term sell-off. For rates, the performance has not been particularly great.
That's been very correlated asset class with the global rates pressures. We certainly are kind of keeping a cautious eye on rates, not being particularly directionally involved. What I prefer here is looking at RVs, idiosyncratic stories.
Generally, when the sell-off in rates is very fast, it's hard to chase it, but certainly the underlying backdrop is cautious for rates. Okay. So, let me bring this back.
We'll circle back from Taylor rules and think about maybe how central banks think about supply shocks. And here, of course, we have the energy story. So, as we speak, as we record this, Brent crude is well back above 100 again.
If we look at gasoline prices, they never really went down after the initial shock of the Iran conflict. And now, they're back. They're making sort of new highs.
If we look at gasoline futures in the U.S., let me ask you about closer to home for you and ask a European gas prices. Those have certainly become a focus lately. Could they or the broader theme here be cause for more substantive pressure on local markets?
So, European gas prices have been very much in focus for us here in this region. It comes back to the very difficult period that our markets experienced at the end of 2021 and through 2022 when gas prices here in Europe really spiked to extreme levels and we saw multiple fall through effects on CE, FX, rates markets, and even broader impact. So, at this moment, European gas prices are starting to exceed 80 euro per megawatt hour.
So, some of these frameworks are all coming back into focus. Now, for us, actually, I would say that there is one key difference and that is that the risks for very explosive price action in gas prices seems more limited this time around. The European gas market is a lot more connected to global markets via LNG infrastructure than it was in 2022.
There is a lot more coal storage globally. So, what we are hearing from our gas analysts is that actually the upside risks are not nearly as high as in the 2021-2022 period. Having said that, gas prices have certainly increased, so we need to be thinking through the impact on inflation, growth, balance of payments, and we are starting to see some of these effects.
Now, from my perspective, because gas prices enter inflation usually via regulated prices, so I think the inflation risk is some, but perhaps not very large, but we are rather focused on the balance of payments risks where you simply have to import gas at higher prices and therefore your balance of payments will deteriorate. We will see some deterioration in the balance of payments, but the starting point has been not particularly bad. Actually, quite good in some cases, but basic balances were in surplus before this latest shock.
So, there is some risk, but we would say contained, and the most interesting thing I would say is that on our past work when we test the relationships, balance of payments does not have very consistent predictable relationship for exchange rates. It actually has very consistent relationship in this region to interest rates. So, although the main risk runs through the balance of payments, the most consistent relationship is higher yields rather than weaker effects.
Now, with that, let us turn to credit markets, and for you, Ben, I have a very similar question. What are the risks here that you worry about the most, and how are technicals and positioning looking for credits? Are you seeing any signals from September issuance so far, any of these technicals stand out?
So, for credit, we have been in a market where we have been really range-bound in terms of spreads. If we look at the EMB global diversified, our main sovereign benchmark, speaking to an investor recently, he said we have been going aggressively sideways for three to four months, and I think that that is an interesting way to characterize it. We have been kind of chopping around, and that is frustrating in terms of, you know, when investors are trying to take views one way or the other.
I mean, I think the risks, you know, this sideways trend is following what has been sort of like a very prolonged period of spread tightening to historic tides, which we saw after the deliberation day of April 2025. And, you know, it has been this environment basically where we stopped spreads going down as yield, as core rates were moving up for the reasons we have been discussing. So, we have had all-in yields move higher, and that is, I think, kept an interest in terms of investors despite what would be, you know, unattractive credit spreads overall.
I think the risk that I would feel is like that we get out of a little bit this sort of benign range where yields are high enough but not so high that they are threatening financing costs, that they are going to be threatening debt pandemics, especially for lower rated sovereigns, which need to issue it, you know, the higher yields, obviously. I think I would be worried, you know, I am less worried at the moment. I mean, at the end of the day, I am worried in terms of spreads if we have recession risk creep back into the table.
That is the trigger that would really send credit spreads potentially significantly wider, not necessarily technical pressure. And we have been discussing the technical pressure potentially from hyperscaler issuance in markets, but really recession risk. And that seems to be not on the table.
The resilience of the global economy has been remarkable this year. So, I think I would be a little bit more worried that basically this sort of strong replacement environment continues to push core rates higher, continues to lead to a steepening of the treasury curve, that we end up with a Fed that ends up doing more than what the market is pricing in, that ultimately just have sort of ongoing higher, steeper core rates, which is going to at some point put more credit risk in and is at some point going to push up the yields at which sort of our single B credit issuers would be looking to refinance in the market up to levels that would be too high and could start to shut some of those solvers out. And I think that would be the dynamic that would worry me.
And I think ultimately, we would be worried about sort of that end cycle dynamic, then turning the page to a recession later on. So, I think it's still an elusive narrative. It's still one which looks like it's going to take time to play out.
And I mentioned technical pressure potentially from hyperscalers in terms of the technical picture that we're seeing in EM. I think it's one which is still really quite supportive. We've had an under allocated asset class for quite some time.
We now have a second year of inflows and basically overall for EM, we've already outpaced 2025 so far year to date. Hard currency inflows are not quite at that speed, but are coming in quite strong. Issuance has been, you know, even though solvers are needing to internalize and validate higher yields, we've had a very active end of summer start to September in terms of the issuance calendar.
And it looks like we're going to be pushing ahead of potentially the issuance high water mark that we reached last year by the time we get to the end of the year. So, I think overall on the technical side, it's not something where we're seeing at the time being something which is worrying us too much. Right.
And I also wanted to update from you on another idiosyncratic topic. Last week, we talked on the podcast about Senegal restructuring and there is another restructuring that is also cozy watch, that's Venezuela. So, what is the update there?
What is the latest in that story? I wish I could give you something more concrete. I mean, we had been sitting and watching and waiting Senegal, as you mentioned, for a long time.
And then finally, we got some announcements that they were going to take action. I think we still have a lot of uncertainty about what that action may be. On the Venezuela side, we're still sort of sitting and waiting for those announcements.
The last sort of official comments we had in terms of guidance was back in the middle of July, almost two months ago now, when the economic authorities of the country said that despite the earthquake, which took place at the tail end of June, that debt restructuring was still a priority and that they can intend to move ahead with this. You'll recall that Venezuela is preparing its restructuring without the IMF. So, this is a quite unorthodox setup.
They're working with their own financial advisors. They've obviously been working very closely in a bilateral relationship, which is also a unique and unorthodox one with the United States. So, we don't have sort of the typical roadmap that we would have in the typical IMF-led restructuring.
We don't have data. Venezuela has only recently started to produce some of its macroeconomic data after nearly 10 years of almost producing nothing. And we don't have fiscal data, most importantly, as we want to try to think about debt sustainability analysis.
So, we expect the authorities and their advisors to produce a more robust set of data, a more robust macro framework around which they will base a debt sustainability analysis. We have had important announcements over the last month and weeks in terms of advancements in the oil sector, the U.S. playing a prominent role there. Again, not really following typical blueprints that we've seen in the past.
So, I think we and investors that are looking at this closely are trying to wrap their head around what these announcements will mean for future production on the oil side and under what time horizon. Those forecasts are critical at the end of the day for thinking about the path of GDP and basically the health of public finances and how much Venezuela will have at the end of the day in order to sustainably service debt going forward. So, we're getting elements.
We're waiting and watching for more specific announcements. At this point, we can't do much more than that. Other than as we do and as the market does, we continue to try to talk to as many people and get as much color as we can to see the direction of travel here.
And let's bring you, Tanja, in at this moment. Thank you for joining us today. And I was hoping we could discuss one of the key political events this year facing emerging markets and that is Brazil's election, which is now approaching very fast and we are seeing a lot of interest in this event.
Would you be able to talk us through the latest developments and your views? Hi, Neska, of course, thank you for inviting me. It's always great to be here.
So, yes, Brazilian assets are now in full election mode. And as you said, the biggest focus is, of course, on the polls. In the past couple of weeks, the gap between the leading candidates, President Lula and Flavio Bolsonaro, has narrowed in a number of major polls.
And the overall picture is now more aligned with the 50-50 percent probability scenarios with momentum shifting towards Bolsonaro after, you know, most of the polls had been given a small edge to President Lula since June and throughout the summer. There's also been some talk about a potential third contender after a little-known candidate called Augusto Cury raised in vote intention to around 10 percentage points in August. But there's been really no momentum after that.
And the baseline is still for a two-horse race with a higher probability of a second round that can be really decided by an inch. Now, as we have been discussing in these conversations, fiscal dynamics are the main source of concern when it comes to the market participants with the government deficit in Brazil at 9 percent and the debt-to-GDP ratios around 80 percent. So the messages and the fiscal choices made after this year's general election will be the key drivers of sentiment in the months to come.
And I think it's interesting to point out how these perceptions for fiscal outlook have been shaping up and evolving ahead of the election with a relatively large number of investors at the moment thinking that the fiscal outlook is actually unlikely to deteriorate much early in the short term under either election outcome. And this view, aligned with the better polling of the opposition, the momentum of Bolsonaro, has resulted in some very positive performance in Brazilian local assets in the past couple of weeks and in a very striking decline in the demand for topside protection, for example, in the dollar-Brazil option space. Investors have instead been more focused on structures providing leverage to further downside extension, which I think is a very interesting development in the past couple of weeks that has opened some opportunities in the option space.
As for views, I would say that at current levels of rates and effects, there's not much risk premiating and the risks into the election still look broadly symmetric for us. The perceptions of what will be pursued regarding the government balances along the broader appetite for risk and all of the elements that you discussed at the beginning of this podcast will play a role in shaping the magnitude of the post-election moves. But in principle, we are looking at a plus minus six percent moves in dollar-Brazil and plus minus 100 basis points in rates, depending on whether the outcome of the election seems consistent with more fiscal deterioration or consistent with consolidation efforts ahead.
So, stay tuned, because it will definitely be a very interesting month and a half ahead of us. Definitely, that will be indeed a very interesting month and a half. Thank you, Tanja and Ben.
And that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast. Thank you all for listening, and we hope to have you back again with us for the next month.
This communication is provided for information purposes only. Please refer to J.P. Morgan Research Report related with content for more information, including important disclosures. 2026 J.P.
Morgan Chase & Company All Rights Reserved. This episode was recorded on the 10th of September, 2026.