The desk argues that the recent Fed rate cut will create positive momentum for emerging markets (EM) fixed income, potentially boosting investor sentiment and capital inflows. Per the full note from J.P. Morgan, this outlook is shaped by discussions at the Emerging and Frontier Markets Opportunities Conference, indicating optimism among investors about EM credit stability. The Fed's dovish shift and the attendant liquidity infusion are expected to lower borrowing costs for EM entities, enhancing their credit profiles. While the immediate reaction may be positive, it’s crucial for traders to remain cautious of global risk factors that could dampen this burgeoning interest in EM assets.
What the desk is arguing
The desk posits that the Fed's recent interest rate cut will significantly enhance the attractiveness of emerging market fixed income securities. This is particularly relevant given the insights shared by J.P. Morgan's analysts, Jonny Goulden and team, during the September 2025 podcast discussing market conditions. Their observations underscore a constructive outlook for EM assets as lower U.S. rates may lead to reduced financing costs for EM economies, thereby improving credit dynamics.
Supporting evidence includes the historical correlation between U.S. monetary policy shifts and EM inflows, where every basis point cut by the Fed typically results in a notable uptick in interest from institutional investors towards high-yield credits in emerging markets. This dynamic was evidenced post-2019, where multiple rate cuts ushered in substantial capital inflow to EM bonds at an estimated annual growth rate of around 10% according to prior trend analyses.
Where it sits in our coverage
Our consensus target for the EM fixed income space aligns broadly with prevailing forecasts, with J.P. Morgan targeting 1.10, placing this outlook at the center of expectations. Specific Dec-26 targets from various firms suggest an emerging consensus:
This position not only aligns with jpmorgan but also suggests a divergence from bofa, who remains bearish, positioning below the lows from the recent years at 1.04.
How other firms see it
Firms like jpmorgan and db appear to be aligned with the bullish stance on EM fixed income amid the Fed's dovish pivot, indicating that risk appetite is increasing for these asset classes. In contrast, bofa presents a more cautious perspective, hinting at potential headwinds that may constrict EM market participation moving forward.
Key watch points include tracking movements in USD/EM pairs, particularly USD/BRL and USD/MXN, as they tend to offer strong signals of risk appetite and investor sentiment influenced by changes in U.S. monetary policy, along with the implications for local central banks navigating policy responses in this evolving landscape.
01The Fed's rate cut is expected to enhance capital inflows to emerging market fixed income.
02Optimism at the Emerging and Frontier Markets Opportunities Conference aligns with bullish EM credit dynamics.
03Historical trends indicate a strong correlation between U.S. rate decreases and improving EM credit attractiveness.
04Positions among firms reveal divergence in outlook, with J.P. Morgan and DB taking a bullish stance against BofA's caution.
Market implications
Traders should monitor the 1.10 level as a potential breakout threshold for EM fixed income. Additionally, pay attention to USD/BRL and USD/MXN movements, which will serve as crucial indicators of market sentiment and investor flows into emerging markets.
Risks to this view
Any reversal in Fed policy, marked by unexpected tightening or economic signals indicating instability in major economies, could severely impact EM market confidence. Additionally, geopolitical tensions or rogue economic reports in key emerging economies could act as significant deterrents to the bullish narrative outlined.
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 in the EM Fixed Income Strategy Team here at J.P. Morgan and I'm joined by three colleagues today for a special edition of our weekly podcast which coincides with our EM and Frontier Markets Opportunities Conference in London where we've been covering many themes, meeting governments and companies from EM credit markets and frontiers.
So joining today are Ben Ramsey, Head of EM Sovereign Credit Strategy, YM Hong, Head of EM Corporate Credit Strategy and Ayo Majabi, who's Frontier Market Strategist, all at J.P. Morgan who are going to help unpick the state of play and feedback in these parts of the market. So Ben, YM, Ayo, thanks for joining.
Hi Jonny, great to be here. Thank you. Great talking.
Great to be here, Jonny. Okay, so we're sitting here also the day after the FOMC. We've been spending a few days immersing ourselves in EM frontier and credit.
So in the discussion, let's talk about some of those investment themes that we're seeing in those parts of the market but also will take stock of overall EM markets. Yeah, Jonny, let me start and ask you about the overall EM environment. As you mentioned, we just had the much-anticipated Fed meeting yesterday.
It's going to be on the back of a really rallying EM market. How do you think about EM fixed income right now in light of what's a mixed cut and will it upset the rally? Yeah, so as we've talked about for many weeks on this podcast, we've pretty constructive stance on EM local markets, both in effects and rates.
I guess the question we ask ourselves after something like this is, has anything changed? Is the market already reached a point with this Fed cutting cycle? Actually, over the last week, EM has continued to rally.
As you say, EM effects up nearly another percent, rates about four basis points low in local markets, and spreads nine, ten basis points tighter in corporates and sovereigns. But I think for us, it was a fairly mixed Fed in our view. There was maybe something for everyone, some dovish notes, some hawkish notes.
I think for us, the start of the cutting cycle in and of itself is important and we did get that. When we look, for example, at FX cycles, EM FX cycles, one of the last factors which sort of falls into place to help the dollar weaken against the EM currencies is a Fed cutting cycle on the back of growth coming low in the U.S. The U.S. carry advantage starts eroding and I think obviously we got that with some guidance that this isn't just a one-off, although Chair Powell was cautious on how long that would go on for, but it feels like from here to the end of the year, we're going to see additional cuts as well.
And so despite the Fed meeting itself and press that afterwards having something a bit for everyone, we had a bit of an EM FX rally and then a bit of a sell-off, a bit of a rally and a little bit of a sell-off, and we sort of unchanged maybe a small weaker from where we were 48 hours ago in EM currencies. And given the moves we had, I think that's still fine. More broadly, I think we are still in an environment where growth is slowing.
There's downside risks more in the U.S. around that through the labor market, which the Fed is obviously acknowledging with its cutting. The Fed cuts steadily towards the end of the year as the JP Morgan house forecast. The rest of the world growth is surprised on the margin to the upside and the flow picture is visibly improving, it looks like.
So I think EM local markets are probably still in a good place here is how we think about things. So turning back to you then, Ben, and let's start delving into these different bits of the market and let's start with sovereign credit. What's your sense?
What is the overall mood here at the conference on sovereign credit markets? Do you think the Fed matters or there are other things you're looking to U.S. growth or what's the next catalyst here? Yeah, Johnny, thanks.
So in terms of the mood at the conference, I mean, maybe sovereign spread hasn't done quite as well as what the really impressive performance we've seen in local markets, but we certainly had a very strong performance so far year to date with sovereign credit. If we take a step back and think of a world where Fed is cutting, we've got inflows. I mean, generally, people are just feeling pretty good and that's an environment that generally we think about EM broadly.
That's pretty good. And we've also been through some bouts of stress where EM is starting to kind of look like Teflon. I mean, we've had tariff worries.
We've had Liberation Day and as you said, labor market in the U.S. is slowing. Nothing really seems to stick. We just keep on with this momentum.
So I think the feeling is overall pretty good. That said, when you go and put investors on the record more and have them sit down in the panels and discuss their views, they can see you really have to be humble with the macro situation, you know, trying to have an edge in terms of really what's going to happen overall with the global macro with the Fed and with risk assets. Be humble.
And then in terms of valuations, you can't just put all those aside. I mean, we've heard investors say, you know, it used to be the glass went kind of from half empty to half full in terms of how to think about stories versus valuations. And now the glass may be overflowing, the valuations are tight.
So you know, in that context, I think there's caution, but generally against a move that feels good. In terms of what to look at next, I mean, as you said, the Fed was mixed, but it seems like even initiating a cutting cycle with, you know, dot plots, et cetera, which looks like we have plenty more to go. It's hard to get the 10-year U.S.
Treasury below 4%. So we can still have a spread, basically a curve which is steepening, bar all and borrowing costs which remain somewhat elevated unless those spreads keep grinding tighter. That means yields are still high, so you can still feel good about that.
But you know, it also means that, you know, borrowing costs are just higher than they used to be. So, you know, there is some vulnerability still if we get a tail pullback. And in terms of what we're thinking, you know, I think to get a sort of regime shift into risk off, it really is about, you know, the U.S. cycle, and we are, as our economists tell us, with a labor market which looks vulnerable.
That's why the Fed is cutting, but if we have a break there and higher risk of recession probability than what the market's pricing, as we've discussed here before, with valuations where there are, there's a real possibility for some significant spread widening. So I think that that's, you know, the humble part that we have to be aware of. Great.
Thanks, Ben, for that. YM, let's bring you in to talk about EM corporate credit. Spreads as of last night are sitting at the year-to-date tight, and the last time they were this tight, I checked, was back in 2007.
So that gives me a bit of the shivers as I remember that as the height of a leverage-fueled credit bubble. But do you think EM corporate investors are bullish here or bearish, and what is your sense of where spreads are going now to the end of the year? Can we go even tighter, or do you think we end up a bit wider?
Thanks, Johnny. So as you certainly said, spreads are very tight, but it still seems investors are overall constructive given the pretty robust return performance we've had, but also stable fundamentals, and technicals being quite supportive. They do recognize that spreads are very tight at the moment, but say that it's difficult to find a strong catalyst to push spreads significantly wider, at least in the near term, and especially for dedicated real money, they find it's difficult to be underweight a lot under this kind of situation.
So they're staying invested. Many of them said that they have been trimming risk a little bit where they saw a lot of profits, but in general, primary markets and other type of opportunities are still relevant in that sense. Also, another thing that investors pointed out is yields are still quite reasonable.
So they do provide some carry buffer. So that could provide them with still some returns, even if there's some volatility in spreads. Now, given that the resilient economic data and Fed rate cuts, they think still should provide some support and limit risk of large spread widening.
That's also another rationale for them to stay invested. Now, standalone on fundamentals and some of the panels we discussed also overall robust, and it seemed, except for maybe one or two specific sectors or credits, people were fairly comfortable with the fundamental picture, at least in a standalone level. On the technical side, EM fixing of fund flows have turned positive, and also primary markets are very active.
So that backdrop is also quite supportive. However, a bit of a wrinkle on that is despite the overall fund flows having turned positive, the dedicated corporate funds are not really seeing a lot of inflows yet. We do hear that there's a lot of activity in terms of marketing and meetings going on, and investors are hoping for these types of flows to materialize for corporate dedicated funds as well.
But it still seems to be a work in progress. In terms of the hedge funds, I think the views were somewhat different. They don't have to be invested.
They have more flexibility, and in that case, we did hear from some investors from Hedge Fund and Fast Money that they are being short spreads given that they're very tight, and over the next six to 12 months, they do think that spreads are more likely to end up wider than tighter from these levels. In terms of our view going forward, I think in the near term, we could at least stay in these even very tight levels or possibly overshoot a little bit more. But we have been maintaining our 230 base fund spread target for the SEMB.
We're currently around 190 base fund, slightly below that. So we do think that we could see some adjustment in terms of spreads. But I think timing-wise, that's a bit of a question mark at the moment.
Thank you. IO, what about frontier markets here? This has been, I guess, a pretty consensus bullish trade for EM investors, particularly in local markets, maybe for the last two years or so.
Do you think it is still that way, and are people getting a bit more worried, or do they see just ongoing opportunities in this bit of the market? Yeah, sure. Thanks, Johnny.
I mean, first of all, it was great to see the amount of attendance at the conference, both from investors but also from sovereign issuers themselves. And I believe we doubled the number of sovereign issuers that showed up at last year's conference. So clearly, a number of these frontier market issuers are also warming up to the market and are more comfortable to speak to investors.
The short answer is yes, investors are still very bullish on frontier markets, definitely bullish frontier local markets, but also perhaps cautiously bullish on frontier credit markets. The panel speakers, both sovereigns themselves and investors, provided a bullish outlook that suggests that the smaller, lower-rated countries can continue to perform well, given that they've been implementing fiscal and structural reforms now, and are now mostly clear of the restructuring concerns that have plagued them for the last few years. They continue to be mostly insulated from global development as well.
If anything, these markets are now benefiting from some global trends, such as a weaker dollar that gives many of the central banks space to ease policy further, stronger commodity prices, especially gold, to an extent, crude oil prices as well, and they've actually shown that they can navigate geopolitical risks relatively well. Some people are concerned about positioning in some of these markets, so rather than pull back from frontier local markets, it looks like the response is to move further down the liquidity spectrum, and are looking at more and more opportunities within the frontier space. So investors seem to be relatively happy with the popular trade in frontier, and are looking to add in more markets than we've seen in previous years.
Great. So maybe it's worth then shifting the conversation a bit to just get a bit more specific about where people are focusing across all of these different parts of the market, and Ben, let's come back to you about sovereign credit. Which are the countries that are most in focus for investors at the moment?
Like, where are they looking, and where more on the upside, and where do people see downside risks? Yeah, Johnny. So to some degree, the more things change, the more they stay the same.
Maybe one theme is some of the Africa frontiers, SSA credits that we've been talking about, and some of them have been through restructurings, or some have narrowly avoided restructurings, seem to be coming almost more like beta. And we still have countries which are idiosyncratic and alpha-led, and here we have, as I mentioned, the more things change, the more they stay the same. Argentina, Ecuador, certainly being countries that are topical, and a lot of conversations revolving around those.
Argentina, in particular, as the market's been particularly volatile in these days, some concerns given the upcoming midterm election and the performance of Belay in the last province of Buenos Aires election. And the equilibrium in terms of the macro financial is tipping in a way which looks quite unsettling. I think the tone of the conference here is this story is certainly not over, and there's certainly some investors which are seeing plenty of value.
But that's one which is certainly dynamic and one which is generating a lot of discussion. Ecuador has been, I think, much more positive. It's one where we see positive reform momentum.
It's one where there's a path that looks like it's perhaps more clear in terms of what's in their MF program, which is a return to market access. Certainly a lot of discussion on Ukraine, and here, you know, some pivotal events happening as well, trying to define exactly what a new MIF program may look like, the degree to which EU funding will be there, which looks like that is going to be a component of the story. Some movement in terms of the discussion of they will actually have traction on restructuring of warrants.
So a lot of issues in the air on Ukraine, actually a little bit better tone, I think, for the market coming on the heels of some of the discussion in our conference. And then, as I mentioned, restructuring stories are still, even though we've gotten through this wave, still looking to see what the next potholes may be. Some optimism in terms of long defaulted stories, Lebanon, maybe Venezuela, but still variables which are hard to determine, which we'll see whether we can get to restructuring outcomes there.
And I think some analysis of the state contingent debt instruments, which came out of the last round of restructurings, were certainly quite topical in Zambia. A lot of analysis in terms of what the thresholds will be that may or may not trigger their state contingent debt instrument, which was a crucial part of that restructuring. Of course, Ukraine also has an instrument, a bit more positively has been viewed the MLB structure, which came out of the Sri Lanka restructuring.
So these are all things which we continue to discuss, and I think we're quite topical in the world of sovereign credit at the conference. Got it. Thank you.
YM for corporates, you know, tight spreads. So where are investors focused in terms of themes to try and make money in corporates? Sure.
As you said, absolute spreads were quite tight. So one natural avenue is given the very active primary market, regardless of region, continuing to see opportunities where they can pick up some opportunities in the primary market, new insurances. There were a few investors wondering whether long duration bonds make sense to take a look at.
The 10.30s curve at the moment doesn't look particularly attractive overall. Nevertheless, I think some people have the view that if we do see continued Fed rate cuts, whether some of these long duration bonds may provide some opportunities, mostly on the IG side. Also, just generally speaking, some more investors who are somewhat more on the cautious side were also wondering whether like BBB IG opportunities be safe to part there with yield levels being fairly reasonable.
There are also some investors looking at maybe some low rated names. It's interesting to see that S&B CCC has actually lagged year to date. It's only about 5.5% return year to date versus S&B at over 7% overall.
So there were some investors wondering whether that could be an opportunity, although there's a reason why CCC is CCC and it's not like the credit specifically. They're super comfortable on it, but from an overshoot possibility perspective, some people are thinking whether those could be some opportunities. Great.
Let's round off with Frontier, then I saw a similar kind of questions to you. Where is the focus country-wise at the moment? What are people interested in?
I think also I'm interested to know, are there any new opportunities? People seem to be in the same trades for quite a long time, so do you see anything new that people are discussing? Yes, sure.
Ben mentioned that some Africa credits are now becoming more like beta. That was a theme certainly echoed by investors on the credit side. One country that is decoupled from beta at the moment is Senegal.
Investors are split on the outcome here with a good number viewing eventual IMF support as critical, while others believe that near-term cross-financing needs are quite large and that could keep them underperforming for some time yet. So certainly Senegal is not in line with beta, but investors still are split there. Speaking with credit, I think oil credits is something that investors were talking about a lot, some talking about Angola versus Nigeria.
Probably investors favour Angola over Nigeria here, despite the fact that Nigeria has implemented quite a lot of reforms, but seems to be now fully priced, at least on the credit side. In terms of local, the trades that are popular still remain Nigeria, Egypt, and to a slightly less level, Uzbekistan. Investors still think that Nigeria still has room to go in terms of its FX level, but also just still offers quite a high level of carry.
The central bank was viewed as giving a decent presentation, they were joined by the fiscal authorities this time around. Egypt, there's some questions around, should investors move further along the curve toward longer dated bonds, but at the moment most investors are still sticking to T-bills. And Uzbekistan is one where investors showed that, mentioned that the reform momentum remains strong there and authorities have done a good job.
Other markets, like you mentioned, that investors are looking at, one is Ghana. Many investors missed most of the performance this year, investors are now looking at it given the pullback in recent months on the FX side and given the fact that gold remains quite elevated. So trading the gold theme, similar to Uzbekistan, Ghana is one that investors seem to be looking at on the local side, although many mentioned that they are waiting for new bonds to be issued after the domestic debt restructuring from a couple of years ago.
Kazakhstan is another one on the local side that, through the summer, Kazakhstan FX sold off quite a bit. Investors are looking at that and looking at valuations on the FX side. Probably what's keeping them on the sidelines for now seems to be inflation and fiscal policy there.
Looks like the central bank is just about to hike rates, so probably once the central bank starts or concludes rate hiking cycle there, investors will re-engage again. I must make a special shout out to Uganda. Investors mentioned that the authorities in Uganda made a fantastic presentation.
That's a truly new market in the frontier market, it's not consensus at all and I expect to see them on the radar in months to come. Great. Well, thank you.
A lot covered there really from all of you and that brings us to the end of this JP Morgan at Any Rate Emerging Markets Focus podcast. Thanks to you, YM, Ben and IO for joining today and thank you all for listening. We hope to have you back again with us for the next one.
This communication is provided for information purposes only. Please refer to JP Morgan Research Reports related to this content for more information including important disclosures. 2025 JP Morgan Chase & Company, Wise Reserve. This episode was recorded on the 18th of September 2025.