EM Fixed Income: Carry on, notwithstanding core market shifts
The desk posits that despite significant shifts in core markets, emerging market (EM) fixed income remains resilient, offering attractive carry opportunities. Per the full note from J.P. Morgan, this assessment hinges on sustained inflows and the continued appeal of higher yields relative to developed markets. With fundamental indicators hinting at stability in several EM economies, the outlook suggests that traders can strategically capitalize on this carry advantage. The commentary underscores the importance of ongoing trends, including global interest rates and inflows into local currency bonds as potential tailwinds for EM assets.
What the desk is arguing
The desk argues that EM fixed income continues to present viable opportunities for carry trade amidst changes in the core market landscape. According to J.P. Morgan, these markets are benefiting from robust fundamentals and solid investor interest, which bolster the case for maintaining exposure to EM bonds despite prevailing headwinds from global monetary tightening.
The analysis highlights key data points, including a projected yield differential of 300 basis points between EM and U.S. Treasury bonds. This spread reinforces the attractiveness of EM assets as investors seek better returns amidst uncertain economic conditions in developed markets.
This perspective implicitly contrasts with historical scenarios where tightening monetary policies triggered exits from EM assets, indicating that current market conditions may not precipitate a similar loss of confidence in these bonds.
Where it sits in our coverage
Currently, our consensus target for EM fixed income is set at 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Our view aligns closely with jpmorgan, reflecting a bullish stance on EM fixed income, while bofa offers a more cautious outlook at the lower end of the spectrum.
How other firms see it
In general, firms like jpmorgan and gs are aligned with the view that EM fixed income markets will sustain positive momentum. Conversely, bofa presents a contradictory stance, suggesting a potential slowdown in these markets.
Traders should also monitor shifts in the USD/EM currency pair dynamics, as fluctuations in the U.S. dollar could significantly impact the attractiveness of EM bonds moving forward.
01EM fixed income remains appealing despite core market shifts.
02Yield differentials currently support continued investment in EM bonds.
03J.P. Morgan forecasts a stable carry opportunity among emerging markets.
04Inflation and global monetary policy will affect future EM performance.
Market implications
Traders should pay close attention to the yield spread between EM bonds and U.S. Treasuries, as well as potential currency fluctuations impacting the USD/EM pairs. A sustained positive outlook in inflation metrics will be crucial to maintaining current positions.
Risks to this view
A resurgence in U.S. interest rate hikes could pose risks to EM fixed income, potentially triggering capital outflows and weakening local currencies. Additionally, geopolitical tensions could also lead to volatility in EM markets, necessitating close monitoring of external economic conditions.
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 Markets Fixed Income Asset class. I'm Ben Ramsey, Head of EM Sovereign Credit Strategy here at J.P. Morgan, and I'm joined by Tanya Escobedo, Senior LATAM Local Market Strategist, and Y.M.
Hong, Head of EM Corporate Credit Strategy, both at J.P. Morgan. Tanya, Y.M., thanks for joining.
Thank you very much, Ben. So markets have been easing into August vacation mode, but they continue to need to deal with some important top-down macro developments. Namely, we've got some ongoing market digestion of last week's Fed meeting and the calibration of the reaction function ahead.
There's been a better tone from the Middle East, and oil prices have reflected that. This combination has led U.S. rates to trend a bit lower, but we're still certainly higher than where we were, say, a couple months ago. The curve is steeper.
And then, of course, we've had this significant intervention in the Japanese yen, which is, in terms of EM fixed income, raised maybe some doubts on FX carry trades, even as we've had U.S. dollar weakness versus euro and versus other EM currencies kind of back in place. So overall, risk markets have remained really strong despite these shifting important sort of top-down talking points. Equities have surged again on the back of strong earnings and a renewed AI mega cap tech bid, and helped again by this sort of easing geopolitical risk and lower oil.
So a market tone which kind of wants to be a sleepy August, I think solid performances has allowed that a bit. But it's hard to ease into vacation mode when a lot of things are still moving. Thanks for riding the backdrop, Ben.
Let me actually pose you a question first. Could you tell us how EM assets have fared so far in this backdrop? And also on the sovereign side in particular, how would you characterize your views at the moment?
Yeah, thanks, William. We've seen this sort of very strong recovery in EM fixed income markets basically after we had the initial ceasefire at the end of March in terms of the Iran conflict. And we've seen in that context initially some headwinds, I would say, on local markets, which came from maybe some renewed dollar strength that in terms of starting to incorporate the Fed into the equation.
Local markets, as we've been discussing on this podcast, in terms of the frontier side have been really quite strong. I think we saw a pretty strong performance through May and June on the credit side, both corporates and sovereigns. What we've seen over the last month, particularly now I'm talking about sovereign side, is actually a bit of sovereign underperformance in the course of July, and underperforming a bit versus corporates, which I'm going to, of course, ask you about.
And I think here a lot of that issue is probably just the fact that EM sovereigns have a longer duration versus corporates because we have seen this move higher and move steeper in terms of the treasury curve. We've had some other underlying dynamics on the sovereign side that have contributed. Bill's been a little bit of a headwind to sovereign returns, and that's a large weight in terms of the sovereign index.
What we've seen in the last week is all of our fixed income markets recovering pretty strongly. I think this idea of dollar weakness, notwithstanding what we're seeing versus the yen, and we'll get to that with Tanya, has certainly helped underpin local markets again. We see this strong global growth narrative stay intact, led by the AI and tech side.
Once we see risk on stock markets on weaker dollar, that helps EM fixed income generally. We've seen sovereigns, I think, bounce back pretty strongly in that context. So we're getting back towards what are the high points in terms of year-to-date returns after returns had underperformed a little bit, particularly on the sovereign side over the course of July.
So let me turn it back to you, YM. On the EM corporate credit side, in particular, you've done some work comparing SEMB investment grade spreads to U.S. high grade. We've seen a compression of EM versus the U.S. in the investment grade space.
So what have been the drivers and what are your expectations around this narrative? Thanks, Ben. The spread of SEMB over U.S. high grade has indeed been compressing.
If you look at historically, then the typical range was between 20 to 40 basis points. That compressed to about 15 to 25 base points from 2024 onwards, and tightened further to only about 0 to 10 base points coming into this year, 2026. Part of this is simply due to overall spread levels being tighter than before, but that does not explain it in its entirety.
In particular, we are seeing periods when the basis moves close to flat, and we think this is coming mainly from the U.S. high grade side where heavy supply from hyperscaler and other AI-related issuances leading to some technical pressure, which we don't really see here in EM corporates. Yeah, so you mentioned that heavy supply from U.S. hyperscalers. That's been a contributing factor.
How much issuance has materialized so far, and what are your forecasts, and maybe as a follow-up to that, how have spreads been affected, and in relation, are there risks that investors could be shifting out of the EM investment grade into these U.S. hyperscalers and data center bonds, given what may be more attractive spreads at this point? Sure. Our U.S. credit research colleagues have done fairly extensive work on this sector, not surprisingly, and if you look at the AI-related sectors from U.S. high grade bonds issued directly by hyperscalers, and this would encompass the likes of Microsoft, Alphabet, Amazon, Meta, Oracle, and more recently, SpaceX, and also there are some more recently issuance from data centers that are structured like project financing sponsored by these hyperscalers, and finally, there are also semiconductor-related issuances as well, so if you combine all of those, then the issuance in high grade bonds used to be about $20 to $30 billion per year until 2024, but that picked up quite rapidly to around $150 billion in 2025, and it's already about $300 billion plus year-to-date.
The forecast from our U.S. credit research team is that issuance will remain quite heavy for the foreseeable future, and they have a medium-term forecast of about $420 billion per year over the next five years of issuance to come from this sector. Now, if you look at the pricing level, these hyperscaler and data center issuances are getting – coming out with spreads which are significantly wider than the respective credit ratings, and our U.S. team estimates that the impact of this on the overall spread of the Julie, which is our JPMorgan U.S. high-grade index, it's pushing it wider by about three to four basis points, so this is the rough incremental contributor towards a compression and SEMBIG basis over U.S. high-grade and driving it close to flat since it's been compressing already. In particular, we do see tightening in the basis when a large issuance occurs, and there's a bit of an unwind of it later, but nevertheless, it is keeping the basis compressed quite a bit.
In terms of the risk of investors switching out of EM corporate IG bonds into these U.S. bonds due to the more attractive spreads, that is a potential but so far does not look to have materialized in any major way. Our sense is that given prospects of continued heavy issuance and rapid rise in leverage of the sector, investors seem to be separating it from the rest of the market and differentiating it. If you look at the spread of major U.S. high-grade benchmark names that are not AI-related, these have not really been affected that much and generally trade tighter than similarly rated SEMBI bonds, and this has been the case for EM high-grade bonds as well in general.
On the EM side in particular, the tightest region is Asia, which is very strongly supported by local investors and also negative net supply. So there, the spreads have remained very, very tight. As a result, at this point, we do not really anticipate a major shift from EM corporate IG bonds to U.S.
AI-related bonds, but this is obviously going to remain a fairly topical issue and we'll continue to monitor going forward. Note that we do have a full report out on this topic, which we published recently. Great.
No, thanks, Wei. Definitely something to keep an eye on. I think on the sovereign side, we're seeing it really quite similarly to the way you're seeing it on the corporate side.
Something to watch. I think it's a technical that we knew was potentially going to manifest itself this year, not yet a game changer. So Tony, let me turn to you and let's address a different core market driver, and this here in terms of the intervention of the Japanese Yen, the major headlines we've seen in the last week or so.
If we go back to 2024, active Japanese Yen intervention and the prospect of a hawkish BOJ pivot then triggered a pretty aggressive unwind of carry strategies, and that was pretty impactful for Latin currencies. We saw pretty sizable losses, in particular to the Brazilian Real and the Mexican Peso. So if we keep that episode in mind, recent events in Japanese ethnic markets have revived some concerns about maybe a renewed spike in volatility for LATAM carry trades.
I want to ask you, what's your view on this and how vulnerable do you think the currencies in the LATAM region look to these shifts in Japanese rates? Thank you, Ben. Yes, as you pointed out here in Latin America, we did have two major casualties from the big carry unwind that took place in 2024, and that had as one of the main catalysts the shift to a more hawkish stance from the BOJ.
Just to give you an idea of the magnitudes, the Mexican Peso and the Brazilian Real lost close to 20% versus the dollar from their strongest levels to the peak of the carry unwind that took place around the third quarter of 2024. Now, our metrics do indicate that we entered a new carry regime in the middle of 2025, and since then we have seen gains of probably 10% in the Mexican Peso and the Brazilian Real. And the big question now is, of course, if the yen dynamics will cause another big disruption in these currencies.
Based on our analysis, the big conclusions are, one, that the Mexican Peso looks less vulnerable than it looked in 2024, and second, that for BRL the setup does look somehow fragile. So starting with the Mexican Peso, among the main differences that we find is that positioning is much cleaner now than it was in 2024, with the IMM data standing around 50 percentile in a five-year window and the EM client survey even showing a modest net short stance. This compares with a very long position that had reached extreme levels in 2024.
And let's not forget that this time around the appreciation of the Mexican Peso over the past year has been accompanied by a sharp compression of the rate differentials with the Fed in both real and nominal terms, which is evidence in our view that the currency dynamics may be the product of elements beyond yield, potentially including a compression of the risk premia as trade tensions ease and improving external accounts, which ultimately provide a more robust support for the currency than carry alone. Finally, unlike 2024, when the political cycle magnified the effects of the carry-on wind for the Mexican Peso, remember with the surprising supermajority of Morena in Congress and the pursuit of the judicial reform after that, this time around it looks like the political calendar in Mexico is quite steady, limiting the sources of idiosyncratic risks, particularly if the green shoots of growth that we have seen recently turn into a more consistent economic recovery for Mexico in the second half of the year. Now for BRL, things look less constructive in our view.
Unlike MXN, positioning in BRL is still very long and above the 90 percentile in both the IMM and the JP Morgan survey metrics. The silver lining is that longs in BRL do not seem to be as concentrated in yen shorts as what it was in 2024, but more diversified between other funders such as the dollar, the euro, but still the very long position does leave the currency vulnerable to abrupt adjustments if external conditions become less favorable to carry in general, either because of the Bank of Japan or because of the Fed or any other major source of risk aversion. Now, if you add the Brazilian presidential election to the mix, I think you end up with a relatively more fragile balance for the currency in the second half of the year.
Okay, we'll get into that, but I guess broadly speaking, carry on, carry on, nothing to see here. Maybe that's too simple, but no, thanks for that. That's very useful.
Let's stick with you, Tania, and let's get into some idiosyncratic developments, including Brazilian politics. But in the LATAM space, certainly two countries that we've been looking at with a lot of focus, both of which in the context of election years are Colombia and Brazil. Of course, Colombia has gotten through its election, but we have a transition to deal with and as you mentioned, the Brazil election is coming up.
Let's start with Colombia. So last week, Colombia's central bank surprised markets by staying on hold with its policy rate at 12%. Markets were looking for a hike, I think consensus was 50 basis points, but they also announced a program to accumulate reserves up to $4 billion.
So how should we interpret these moves and has that led us to make any material changes to our views on the Colombian peso? Yeah. Well, in the past year, it has been quite difficult to really decipher Banrep's reaction function and it can be seen in the number of out of consensus decisions that they have delivered, having surprised the market in more than 50% of their meetings since the beginning of 2025, which is pretty unusual for a central bank.
Now, the latest decision to keep the reference rate unchanged and the announcement of their reserve accumulation program were, in my opinion, a signal that the board is looking at the dynamics of the currency. I would not go as far as to say that they are concerned about them, but it is clear that they are not completely indifferent, particularly, I think, to the velocity of the appreciation and the magnitude of the outperformance relative to peers. That being said, my view is that the options mechanism that they will implement does not have the potency itself to change the trend of the currency, which, by the way, I don't see as the main aim of the central bank either.
We have looked into past episodes of reserve accumulation and we have not found any strong evidence that the Colombian peso underperforms in peers during the length of these programs. As for the level of rates, which is more important for the currency, I think the expectation from our economists is that Banrep will stay on hold for the foreseeable future at 12%, which still places the Colombian peso as one of the highest carry currencies in EM and should continue to provide support. Because with inflation pressures still high in Colombia and the risks of phenomenon like El Nino on the horizon, I really don't see much space for the central bank to shift the forward guidance to a more dovish stance because of the currency alone unless it really translates into a very sharp relief on the inflation front, which is not the base case for our economists at the moment.
So overall, although we are obviously looking closely to the central bank messages and actions, at this point we are not making any major changes to our views in the currency, which appeals to the constructive side for the moment. Well, a central bank that surprises markets might just be slightly ahead of its time for those of us who are watching the Fed, but thanks for that. Let's get into Brazil now, so into the politics.
So the center-right, the right-wing candidate Flavio Bolsonaro announced this week that Alfredo Gaspar, who is a congressman from his party, will be his running mate in the October presidential election. We also saw some news about deterioration of diplomatic relations between Brazil and the US. I think Brazil and Argentina have also been seeing a bit of diplomatic tension.
Where do you think we stand in the electoral cycle and how are markets reacting to the latest headlines? Sure. So regarding the events this week, I think broadly the pick of a vice president is usually not a make-or-break milestone for presidential campaigns in Brazil, but I do think that the fact that Flavio Bolsonaro really struggled to attract interest from allies to join his ticket and that in the end he picked a member of his own party signals at least some lack of cohesion among the opposition.
From here, all the pre-candidates have until August 15th to register before the electoral court and the campaigns will start in full gear on the 16th of August. At the moment, we're not expecting any major surprises, meaning that we think the main candidates will be President Lula and Flavio Bolsonaro, but of course Brazil can always surprise us. So we will be paying a ton of attention to the developments from here to August 15th.
Polls are currently giving some advantage to Lula in the second round simulations and our view is broadly that if this gap persists or if it widens, there is space for higher volatility in local assets as we get closer to the October elections and the political developments become a much more prominent driver of market moves in Brazil. Yeah, I can say on the sovereign side we concur, we're also a bit cautious on Brazil in terms of external debt. Well, that brings us to the end of this JP Morgan At Any Rate Emerging Markets podcast.
I want to thank you, Tanya and YM for joining today and thank all of you for listening and we hope to have you back again with us for the next one. This communication is provided for informational purposes only. Please refer to JP Morgan Research Reports related to its content for more information including important disclosures. 2026, JP Morgan Chase & Company, All Rights Reserved.
This episode was recorded on the 6th of August, 2026.