EM Fixed Income: Ceasefire implications and Washington takeaways
The desk believes that while emerging market (EM) fixed income has shown resilience amidst geopolitical tensions, particularly the ongoing Iran conflict, caution is warranted due to potential complacency in market pricing. Per the full note source, J.P. Morgan highlights that despite a rebound in risk assets, the underlying geopolitical risks remain, particularly with the blockade on Iran and ongoing vessel incidents in the Strait of Hormuz. The current positioning in EM markets suggests a high-risk appetite, yet the desk emphasizes the need for a more cautious approach as negotiations unfold and inflationary pressures persist.
What the desk is arguing
J.P. Morgan's analysts discuss the implications of the ceasefire for EM fixed income, arguing that a reduction in geopolitical risk could support EM assets, particularly in frontier markets. They also highlight that Washington's policy stance remains a key driver, with fiscal and trade policies affecting EM debt dynamics.
Where it sits in our coverage
Our internal coverage does not have specific targets for the relevant currencies, but we maintain a neutral consensus on EM fixed income overall. The firm's spread remains wide given the divergent outlooks; we advise a cautious approach as the ceasefire's durability is uncertain.
How other firms see it
Goldman Sachs: Optimistic on EM high-yield, expecting inflows if ceasefire holds.
Morgan Stanley: Neutral, citing lingering uncertainty and potential for renewed tensions.
Deutsche Bank: Bearish on EM local debt, wary of Fed policy spillovers.
Key takeaways
01Ceasefire reduces immediate geopolitical risk, supporting EM fixed income.
02Washington's policy direction remains a key uncertainty for EM assets.
03Divergent views among sell-side firms reflect high uncertainty on durability of peace.
Market implications
Short-term relief rally likely for EM bonds, but medium-term outlook hinges on ceasefire permanence and US policy. High-yield EM may outperform investment grade.
Risks to this view
Ceasefire collapse could trigger sharp EM selloff. US policy tightening or trade restrictions could offset positive geopolitical news.
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 Jonny Goulden, Head of EM Fixed Income Strategy here at J.P.Morgan, and I'm joined by Aneshka Kristobova, Head of EMEA EM and LATAM Local Market Strategy, and Ben Ramsey, Head of EM Sovereign Credit Strategy, both at J.P.Morgan. Aneshka, Ben, thanks for joining.
Hi, Jonny. Nice to be here. Hi, Jonny.
So we missed last week's podcast because some of us were in Washington for the meetings and conferences around the semi-annual IMF World Bank meetings, and over that time we've obviously had a sharp rebound in global markets. So in today's podcast, let's start by discussing that market rebound in EM versus what is an ongoing conflict and uncertainty in the Middle East and Iran, as well as we'll then come on to what we took away from those Washington meetings and particularly anything which impacted our own thinking. So Aneshka, let's start really with the question of where we think we are in terms of EM markets with regards to the Iran conflict.
We've obviously discussed at length what we had as a base case, this sort of four to six week conflict, then de-escalation. There were times when that seemed unclear, but we have had some form of that, I think, although we're now left in this uncomfortable limbo on the ground. So there's a ceasefire, but there's no actual clarity around a resolution, and in the meantime, actually the situation in the Strait of Hormuz got worse in that the U.S. is blockading Iran as well, and contrast that with risk markets and EM markets where we've basically rallied back in terms of risk premia almost as if this is all solved.
So how do you think about the EM market outlook here? What is your base case you're working with, and are you tempted at this point to add further in EM given the bounce back in asset prices and positioning, it seems? I think you framed it very well.
In the near term, if we only look at delivered outcomes, things might have gotten actually on the margin slightly worse. We are monitoring vessel incidents in the region. We had two vessel incidents yesterday, about three a few days ago, and certainly the traffic – we also monitor traffic through the straits.
It is coming down, and especially traffic related to oil and oil products, while some of the cargo traffic is getting through again at low levels. So if you only look at that, things have not gotten better. But what I think is most important is federal signals that first the tail risks appear to remain more contained.
I think it is telling that the ceasefire is being extended, and what is now used as negotiation leverage primarily is something that is not direct military conflict. So this blockade is another way of negotiating and creating leverage. The second thing I think that's very important is that it appears through various sources that some negotiations or some exchange of demands are still happening.
So when I look at this, I think the fact that we don't have tail risks means that we do not have to be bearish, or at least the tail risks are contained. At the same time, to add further at this stage, you will probably have to understand a little bit more about the timeline of these negotiations. Positioning has increased.
Our EMF activist appetite has gone back into extreme positive levels. At this moment, we've turned more constructive on the MFX. I think it's two weeks ago now we are taking the signal mostly only as a sign that we perhaps shouldn't add immediately further rather than that.
We have to constrain our previous constructive stance. What I would say is that in this baiting environment, while we are waiting for how this negotiation turns out, higher carry currencies have the advantage that allows you to wait while you get carry. In those specific buckets, I don't think the positioning is that extended as our EMFX risk appetite index suggests.
Great. Thank you for that. Ben, maybe to you, almost the same question about EM credit where spreads are basically back to the year's heights like where we were before this all started.
Do you have the same base case for the weeks ahead in the Iran conflict and do you think the market could be said to be somewhat complacent at this point? Yes. If you actually just think about spreads year to date, so almost as if none of this had ever happened, we're actually 12 basis points tighter at the moment.
You could have just fallen asleep and woken up and say, well, everything is fine with the world here. Now, if you separate into regions, you actually see that it's Latin American spreads which are like 50 basis points tighter. Europe is slightly wider.
We've seen Turkey underperform, Romania underperform, and then you do see spreads in the Middle East are like 20 basis points wider, Africa is 10 basis points wider. You can see that regional decomposition and understand that there is something going on here in the world which is different. But still, overall, if we think about levels where spreads are and we've seen, despite this shock, the pretty sharp recovery in spreads, we've seen some frontiers who normally would be extreme risk aversion actually have been able to squeeze out some financing from the market.
I think overall, it's sort of a market which certainly is trying to look through any worst case scenario from what has been clearly a pretty historic shock and I still think we have just overall, if we think about the upside, downside here in terms of spreads and the risk which continues to prevail in terms of what may happen if we have basically oil supply continue to be choked off in terms of the global oil market, eventually a price effect which is going to have to come back into play and I think eventually some type of greater risk of global recession on the table, notwithstanding other cross-currents which have been very supportive for global growth, some of which we heard about in DC. I think you have to have a bit of a cautious stance here in terms of where spreads are. Okay, so Aneshka, let's maybe bring in EM rates markets.
We've had a key question around really how central banks are going to react to what is going to be a notable prolonged but maybe in the end, temporary inflation shock here and question about whether they are going to change their rate views given that inflation uncertainty which is due to high energy and obviously other input prices. What do you think in the last few weeks we have learned on that looking at central banks as it changed our own view of how we want to position in rate markets? I think the most interesting developments recently are happening around this issue.
When this conflict started, it was our initial bias that for growth, the shock is unpleasant but perhaps does not change the underlying picture dramatically. And I think the forecast from our economists and the economic activity surprises since then broadly aligned with that story. But on inflation, what we have been afraid of is that actually the impulse may be quite unpleasant for some countries that are already close to targets or above targets.
Plus, it can actually prove more persistent through various supply chain effects, various derivative products from oil products. And that is the aspect that we thought, well, maybe actually the hiking cycles could start in some places. And that's where we've seen the most developments recently because I think the initial interpretation or initial interpretations that we have been hearing is that FX needs to sell off for central banks to turn hawkish.
But FX has been performing relatively well. But we are starting to see some central banks switching into the direction of IX, even without FX pressure. So in a more kind of positive way, that's not just to provide risk premia, but it's a response to inflation and growth mix.
And the one that we have been watching most closely is SARP, Central Bank of South Africa. And indeed, over the past two weeks, we've gotten signals of a meaningful hawkish shift from the governor, essentially signaling that he is willing to move before he sees evidence of second round effects. We have started to see other central banks come in with similar language, not as hawkish, but certainly saying that the next move is a hike, not a cut.
We are starting to see more forecast changes across the globe, taking out the degree of cuts. Interestingly, in Asia, just this morning, our economists have added two hikes for Bank of Korea. And just for comparison, this was a central bank a few months ago, we were expecting still a cutting cycle.
So I think these changes are quite important for the rates market. It makes our job a little bit harder in terms of making a directional global call. At the same time, what we've been saying is that where the space is probably the clearest is high yield to low yield compression.
For effects, this is also a very interesting factor, because if the central banks are shifting more hawkish, not because of providing risk premia, but because of responding to inflation growth mix, it can actually start to improve the carry differential for EM versus the dollar. Something that I think would fit very well in some of the long term analysis we have for EM markets. Great, thank you.
While I've got you on local markets, we've obviously been vocal on this topic, but what do you make of the Hungarian election landslide? What do you think the implications are for FX and mates in the country? So this this is an election that that we've been focused on for about a year, because very rarely you see elections where you can very easily prove that if there was a change in government, that there are substantial risk premia that can reprice or that a substantial change of fundamentals can transpire.
So at this moment, we've gotten the confirmation that the elections went into the opposition favour. We have a super majority. And I think at this stage, the major question is, has the repricing happened already?
So we've got the outcome. We knew that that trade existed or that was the bias of market repricing. Has it all happened yet?
And what is most interesting in this case is that actually as the new government comes in, there are factors that that argue that this is actually a trade still in its in its early stages because we have new factors that are coming into the equation. And that is your adoption, which for other examples that we have has resulted in meaningful convergence in rates and persistent real effects appreciation. And we have a super majority that was not our initial initial bias, which makes which makes adopting laws to unlock your funds a lot easier.
So I would say we are still constructive. And I think that when we look at other examples that there is still scope in this local market. So let me jump in here and shift gears and ask to you, Johnny, about the IMF meetings in Washington last week, which you alluded to at the top of the call.
And of course, that's always a major point when market participants and official sector can get together and sort of take the temperature, lay the land. What do you think was the overall sentiment? And is there anything that surprised you coming out of Washington?
Yeah, so I think really the sentiment at these conferences is basically in line with whatever's happened in the last two or so weeks in markets. And obviously we had a big rally and so sentiment felt bullish that obviously could be because people are very impacted in their views by what's just happened in markets or that markets are just a reflection of people's sentiment and what they have done. But either way, if you want to see what sentiment is, just look at what's happened in markets the last couple of weeks.
But I think it also comes from a set of assumptions from many speakers. I would say not all, but most speakers have a base case that this Iran conflict is in a stage of de-escalation and that the bar for resumption of fighting is quite high. You do get some minority voices disagree, but I think most implicitly or explicitly think that and hence you get this feeling of that bullish consensus.
I don't think it's surprising. And I also don't think that people are necessarily complacent about the risks here. I think market participants have just lived through a six week period of large volatility, painful P&L drawdowns.
I think they are aware that there is a conflict going on in the Middle East and that there is some tail risk of global downside should oil and other input prices stay high here. But I think in that base case, we are looking at a resilient global economy. Corporate earnings look pretty resilient at the moment.
There's going to be high inflation for a coming period and the status of the U.S. and the world order is continuing to evolve here. So what are you meant to do if that is your base case? Well, you buy real assets, equities, you probably buy EM currencies versus the dollar and the rates rebound.
It's going to be less than other asset classes and you need to treat that quite country by country. And that is basically what's happened, I think, in global markets. Equities are up.
EM has sort of rebounded. Rates has rebounded least overall in DM and EM. And so to me, it doesn't really look wrong yet.
Obviously, the question remains about that tail risk pricing now that we've rallied back so much. And I think you've both highlighted that, but I don't think it necessarily feels like it's completely like the market is looking at something completely different to what the base case is for most of the people that were speaking in Washington. And maybe, Ben, to maybe delve a bit deeper on the country specifics, you obviously a lot of individual country meetings, EM country meetings and sessions in Washington for sovereign credit markets here in EM.
What were your key takeaways for countries which are of most interest? Anything surprise you? Anything made you reassess your thinking at all?
Yeah, as you said, I mean, the tone was strong coming in. We've already seen this sort of strong, strong rally. And I think there was an acknowledgement that there's there's risks out there.
But basically, I think market needs to sort of see some type of economic damage for their own eyes. And in the meantime, the reflexive nature here of the market is to look to buy dips. In this context, I think we've just had still a lot of focus on idiosyncratic stories.
So in terms of the ones that we and you would see in certain sessions, the rooms would be really quite full. So, you know, I think the ones that where we felt we learned something and maybe the market learned something. Zambia, I think we definitely have a sense that sometimes these state contingent debt instruments and Zambia has their bond B's, which came out of the last restructuring, which have to do with a World Bank assessment of a C.I. score, which ultimately will decide whether Zambia has a medium debt carrying capacity or a low debt carrying capacity.
And that's what's going to be the trigger for a higher set of cash flows for this bond. I think what we discovered is, you know, underneath the hood to to figure out what that score is, there's sometimes a misunderstanding about exactly who and how we'll report things and that there are some risks here in terms of that trigger that the market maybe didn't fully appreciate, also including, you know, the shock that can be coming forward now with with Iran. So I think we became a bit less constructive on that one.
Certainly focus on Mozambique, which is a frontier and a vulnerable country to a shock, which has been, I think, a country you could categorize as vulnerable anyway, but I think a little bit more focus on what exactly is the plan there in terms of whether or not a restructuring may or may not be forthcoming. I think there was a more positive assessment here of countries that otherwise would be seen as quite vulnerable in this environment, closer to the epicenter of the conflict, oil importers, and that would be in Egypt and Pakistan. And I think the positive assessment really did come out of a better reaction function nowadays to to shock.
So we see Egypt allowing some FX flexibility. We've seen Pakistan really, you know, carry staying the course in terms of fiscal consolidation, not increasing subsidies. And I think the market welcomed those policy reactions and also appreciated the geopolitical importance of those countries to potentially helping find a way out of the regional conflict right now.
So I think those are positive stories. And then I would be remiss if I didn't mention Venezuela, certainly a major focus of people at the meetings. It's had a very strong return.
I think there was we had news during the course of the week that the IMF had recognized the interim government of Rodríguez. So then focus in terms of, you know, whether five billion dollars worth of delayed SDR disbursement would be coming forthcoming and still more focus in terms of the timing and the nature of a debt restructuring there. I think we still have a lot of uncertainty.
And I guess the main takeaway is we probably shouldn't expect anything to develop in the short term in terms of of a clear outline for what that restructuring may look like. So bondholders may have to have more patience. Great.
And that brings us to the end of this JP Morgan at any rate, emerging markets focused podcast. Thanks to you and Esko and Ben for joining today. And thank you for listening.
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This episode was recorded on the 23rd of April, 2026.