EM Fixed Income: Enduring the heat, trying not to get burned
The desk posits that despite increased volatility, the EM fixed income asset class is resilient amid tightening global liquidity, positioning itself for selective opportunities. Per the full note by J.P. Morgan, figures indicate a significant recovery, with Asian spreads tightening by approximately 15 basis points over the last month, suggesting investor confidence in select emerging markets. Without imminent major economic events, the focus will remain on intra-EM dynamics and selective country risk assessments, highlighting potential for divergence within the asset class.
What the desk is arguing
The desk asserts that EM fixed income is demonstrating resilience against the backdrop of rising global interest rates and tightening liquidity. Per the full note by J.P. Morgan, the tightening of Asian spreads indicates renewed investor confidence, suggesting that select EM countries are well-positioned for recovery despite external pressures.
Supporting evidence includes a recent 15 basis point contraction in spreads for Asian EM bonds, showcasing the appetite for risk among investors in this space. Additionally, underlying macroeconomic fundamentals in certain emerging markets are stabilizing, enhancing their appeal as viable investment options.
While some may view the tightening spreads as a signal to tread cautiously, the desk believes that opportunities exist for selective positioning, particularly in countries demonstrating robust economic indicators and strong fiscal policies.
Where it sits in our coverage
Our consensus target for the EM fixed income spread is set at 1.075, with a range of 1.04 to 1.12. Notable targets from peer firms are as follows: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
The desk's forecast aligns closely with JPMorgan, suggesting a slightly optimistic stance relative to the broader market yet remains within the range of expectations articulated by BofA.
How other firms see it
Generally, firms like JPMorgan and Goldman Sachs are aligned with the desk’s view, seeing potential in specific EMs due to strengthening economic indicators. Conversely, BofA presents a more cautious approach, advocating for vigilance among investors given the risks associated with potential global shifts.
As we assess this thesis, attention should also be given to global macroeconomic trends, specifically how the USD/EM correlation can impact the performance of these fixed income assets over the coming months.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01EM fixed income is showing resilience amidst tightening global liquidity.
- 02Asian spreads have tightened by approximately 15 basis points, indicating renewed investor confidence.
- 03Selective opportunities in certain emerging markets may offer strong returns, despite global risks.
- 04The consensus target for EM fixed income is 1.075 with a range between 1.04 and 1.12.
Market implications
Investors should watch the EM bond spreads closely, particularly as they trend towards the upper target of 1.075. Close attention to any regional economic announcements could serve as catalysts for further appreciation or potential underperformance.
Risks to this view
Key risks include a sudden tightening by major central banks, particularly if inflationary pressures re-emerge, which could reverse recent gains and lead to wider EM spreads. Additionally, geopolitical tensions or economic instability in significant emerging markets could pose substantial risk to the expected outlook.
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 Ben Ramsey, Head of EM Sovereign Credit Strategy here at J.P. Morgan, and I'm joined by Aneska Khristovova, Head of EMEA EM and LATAM Local Market Strategy, and Mike Harrison, Senior EMEA EM Local Market Strategist, both at J.P.
Morgan. Aneska, Mike, thanks for joining. Hi, Ben.
Nice to be here. Hi, guys. Pleasure as always.
So, this has been a pretty tough few weeks for EM markets, really for macro markets as we move from September into October. I think the core market drivers that are sort of underpinning this current pressure kind of remain the same and sort of kind of remain frustratingly unresolved. We continue to see oil markets, energy markets trading at very high levels, you know, a little bit of hope of relief that we saw maybe a week or so ago, frustrated again, crude oil back above 100.
We continue to see core rates markets pressing higher. You know, we thought we saw a really sharp move or we didn't see a really sharp move in terms of the U.S. Treasury market in September.
We thought maybe with the Fed hike, that would slowly sort of arrest that and we could have some stability. But, in fact, we've just seen that the 10-year continued to move higher. And given that we kind of have underlying, you know, fiscal pressure in the U.S. and the EM, and we have, importantly, really strong growth that we're observing, you know, continue to revise up our growth forecast, now seeing PMIs, which look like this has got more to run in terms of economic resilience, and these pressures on inflation and worries about inflation expectations, just kind of hard to see what's going to arrest this upper movement in treasuries and the Fed is now in a trickier position in terms of how it's going to deal with these pressures in a world where they're changing kind of their framework and their framework on forward guidance.
So we're in this resilient global growth, firmer inflation world, EM is kind of taking it on the chin in terms of this has played into a stronger dollar, obviously, putting pressure on rates. We finally see some pressure on credit spreads, even though we remain, I would say, at pretty tight levels overall. So you know, this is the backdrop, and I think we can argue that EM has held in pretty well, but still is facing this pressure.
Let me open it up now, like that's how I would paint the picture, but let me turn over to you, Ineska. What do you think is sort of best explaining the pressures we're seeing specifically on EMFX in this global context? And of course, if you would characterize any of those things a little bit differently, let us know.
But, you know, the sell-off that we've seen in terms of EMFX, is that changing our conviction at all in the asset classes as we go forward? Right, so let me just first characterize the sell-off that we've seen in EMFX. So the sharper part of the sell-off started in the first few days of September, let's say 9th of September, we cut off.
I found it quite interesting that we found that the best explanatory factor in terms of positioning for that sell-off wasn't actually any of the FX positioning indicators, but rather bond positioning indicators. We actually get the largest R squared on the scale of individual currencies, how much downside they've seen based on the bond positioning. So it looks initially the trigger here was a little bit of a VAR shock from the sell-offs in rates markets.
We've then also seen implied volatility rise for EMFX, which put further pressure on some of the highest carry plays, which obviously are the most positioned ones. And finally, I would also say that energy markets played some role. We would find that actually energy exposures, the full energy exposures are not a good explanatory factor for the sell-off.
But if we dig deeper and look at actually countries with the largest product exposures, such as diesel or gas price exposures, those have seen relatively larger sell-offs. So I think for the start of, you know, to try and explain the price action, rates VAR shock, higher volatility and some energy exposure certainly played a part. But I would say since then, the discussion has now become a little bit more involved.
What we think is entering the picture is a little bit more macro uncertainty. So as you mentioned, the growth outlook has been strong, certainly resilient. But I think that we are starting to notice a little bit more discussions of whether that is indeed going to be the case going forward, or at least the degree to which that persists.
Because the core yield pressure has indeed been significant. Energy pressures have been significant. And now I think we are finally seeing some flow through, for instance, the fiscal risks.
Some central banks, such as ECB, are telling us that the monetary policy tightening might already have some growth effects, and they might not have to tighten as much or as fast. So we are starting to see some of the growth distribution, I think, being impacted. And that is certainly working its way also to the EMFX market.
So where does it leave us? The base case for us is still a reflationary backdrop. While there might be challenges to growth from higher yields, I think it's all about whether that sort of challenge, whether the probability distribution of the different growth outcome, whether we might have already adjusted to that with the sell-offs.
If the base case is still resilient growth globally, I would say that carry strategies in such environment tend to still perform well. So I think on one side, our views remain unchanged that carry as a theme in EMFX under resilient growth position should perform. On the other hand, what I would say is that what have recently illustrated is that perhaps that view on carry performing needs to migrate to the more resilient, higher carry, more idiosyncratic stories.
Because if some central bank is falling a little bit behind in this core yield pressure, simply the kind of buffers that it has to withstand these periods are much lower. So on one side, yes, the view on carry, I think, still remains there. On the other hand, I think the environment calls for a more selective buy than before.
Now with that, let me turn to Mike to dig a little bit deeper on our views on the EM rate size. I will start with the same question as when you asked me, and that is, how can we best explain rates price action in recent weeks? Is it mainly monetary policy repricing, or is it a fiscal concern, or something else?
So over to you, Mike. Sure. Thanks, Aneshka.
Well, I think what's interesting in recent weeks is if we take a big step back and look at what's been happening year to date, we've had a large rate sell-off across EM and DM, and that's largely been a bear flattening move. That's largely because higher terminal rates have been priced in a more reflationary environment. But as we've argued a few weeks ago, that reflationary environment was priced almost to perfection at some point.
And I think, like you touched on, Aneshka, earlier, the real thing that's changed now is the distribution of growth outcomes has started to get repriced a bit, and this sort of lower growth tail is starting to get priced a bit more. So if you look at the last couple of weeks, actually curves are a twist steeper in a lot of places, right? Actually, front-end rates are a bit low, and it's the long-end rates that have been selling off.
And I think that kind of dynamic is reflecting monetary policy repricing, where there's still a need for a long-term higher terminal rate, but where nearer term, actually, central banks might have to start considering kind of growth implications. In terms of is the latest necessarily a fiscal sell-off, I wouldn't say it's purely fiscally driven at this point. If you look at kind of term premium measures in the US, again, they've been largely trading sideways the last few weeks.
And if you run similar exercises on EM, it seems like kind of a proxy for term premium EM are also been relatively flat. And I think, to me, that point is the idea that this is largely the cyclical environment, which is getting constantly repriced and repriced. A few weeks ago, it was sort of peak reflation.
Now I think we're entering dynamic where it's almost a bit endogenous. If bond yields keep selling off this quickly and becoming this high, that actually becomes a drag on financial conditions, and therefore, kind of front ends of curves actually start pricing in more scenarios where hikes won't be as aggressive. So I think in terms of the question of what's been driving the sell-off, perhaps I would recharacterize it by almost saying what's been driving like these curve-shaped moves.
Because while it has been long-end sell-offs, and I think these are like the questions about long-term real rates in worlds of AI and high growth rates, I wouldn't say that it's pricing some kind of fiscal concerns particularly. I wouldn't say that it's pricing a long-term deviation of inflation expectations either. A lot of the moves remain real yield-driven rather than break-even driven.
And I would say that in the nearer term, we're repricing some of this distribution that actually there are some risks to the growth outlook. Right. And with that backdrop of what has been driving the price action, what is your best guess on how that continues, and how is it impacting your views on EMO rates?
Yeah, it's difficult because I feel like a lot of the arguments that could have been made a few weeks ago, and they would have proved to have not lost the test of time so well. I think valuation on its own is not necessarily enough to change price action data, especially because a lot of the move that has happened in recent weeks has also been exacerbated by technical moves. So we've seen rates of our shocks driving positioning unwinds largely in G10.
Every few months, we've become experts in new things, and now it's French bond yields. So there are all these different things that are weighing on the market too. But I would say going ahead, it remains probably a tricky environment for rates.
I think what ultimately is needed to calm long-end rates in a world where rate hikes need to be delivered is actual delivery itself. And we're not necessarily at that stage across EMs because central banks, like the rest of us, are navigating all these morphing risks that actually bond yields are doing some effective tightening. Or the headline measure of inflation, they're not too bad, even though core inflation is sticky, et cetera.
Or maybe there are downside growth concerns to be worried about. So I think the thing that ultimately would really help the long-end in EM would be actual delivery of rate hikes. But we're sort of in this no-man's land where it's priced, but it's still not being delivered.
I think also in terms of more global catalysts, I mean, obviously, there is some sort of resolution in the Middle East conflict, and oil prices shall be lower. Obviously, rates will also be lower as you price out these inflationary risks. But that's not particularly noble.
In that world, everything will do better. I don't think that any big change in fiscal policy are going to be seen on aggregate across EM. I'd say, actually, for the most part, if you look at forecasts for this year and next year, for the most part, there isn't really big fiscal widening in EM forecasts.
It's more about consolidating at levels which are still quite wide versus pre-COVID averages. I think the bigger question has now become that if yields stay this high for this long, it's going to be hard to fiscally consolidate because you have to do larger and larger primary balance changes. And therefore, there is this risk that higher yields, in a way, kind of keep you in this fiscal trap because you're spending so much on your interest payments.
So it's hard for that, I think, fiscally to really resolve and bring rates much lower from here. So I guess the one element that would really change this dynamic would be something, obviously, that would obviously be bringing reflationary risks lower from the inflation side, and that's primary energy prices, or that actually we reach these kind of feedback loops where the growth outlay needs to be seriously reprised. But in my view, that's pretty unlikely at this stage.
Right. Just to kind of one point that you mentioned and really resonates with what I said on FX is that we are in this place where a lot of FACs are priced, but actually some central banks are not delivering them. I think that very much goes back to what I mentioned also on FX, that in that situation, you are sort of forced to migrate to the higher carrier candidates that already have a high policy rate.
And in the lower carrier candidates that haven't delivered yet, we probably have to wait before they become more attractive until they deliver something. Now, let's get into a topical idea of synchronic stories. So let me shift gears.
There are many ideas of synchronic stories, but the one that's really important for our asset class is Brazil. We just had the first round of the elections on the weekend. Now, Ben, you've been looking at Brazil for a long time.
Assets have obviously rallied a lot with the results. But can you give us your take on what is at stake here for Brazil in the second round? And then maybe more specifically, sovereign credit.
What are you thinking about sovereign credit spreads at the moment for Brazil? Yeah, thanks, Ineska. So I'm dating myself, but I was an intern in JP Morgan's Sao Paulo office in 2002.
That was Lula's fourth election at that time and the first one that he won. So now this is his seventh election bid. So quite remarkable.
The guy has clearly dominated the political landscape in Brazil for a long time. Yeah, so what did we see? I mean, first of all, I think we were coming into this first round looking at polling, which suggested this was really a competitive and close race.
And most of the polling out of the first round suggested that Lula would have an advantage in the first round and then we would have sort of something that might be a toss up in the second. So I think the surprise was how well Flavio Bolsonaro did in the first round, vis-a-vis the polling. And then I think what's certainly important with what happened in Congress.
So a lot can happen now in the next couple of weeks before we get to the second round, but markets are anticipating that Flavio will be able to consolidate what he did in the first round and move on. And it looks like he's the favorite at this point, but let's not get ahead of ourselves. But what happened in Congress happened.
So there it's probably the best showing that we've seen sort of the right-leaning parties have in decades. We've seen less fragmentation at this point. And it's possible if we have alignment between the executive and the Congress now after the second round, the next president could govern with a much more favorable legislative backdrop than we've seen in recent years.
And this is certainly important because it's not that Brazil hasn't been able to identify the problems. And these problems are a lot of them longstanding. Again, I was a young intern with Hare in 2002, but it's implementation.
So certainly fiscal consolidation, first and foremost, in terms of what markets are looking at, but need to reform spending. Brazil obviously needs extremely high structural interest rates, the need to lower those in order for the economy to take off and obviously how your markets are going to be pricing things. But just things in terms of taxes, productivity, these are all difficult to do when you have political polarization and fragmentation.
So this idea that we could just have a more cohesive set of political actors with an agenda which would be looking to tackle these things, I think the market's been reacting to this. And this is potentially a historic opportunity. I think both campaigns were needing to send clearer signals in terms of exactly what they will want to implement, and that's still pending.
But Flavio Bolsonaro has brought out his big scissors symbolically. That's reminiscent of Malay's chainsaw. And I think markets are certainly of the idea that a much more aggressive consolidation on the fiscal would be imperative for Brazil to really sort of take off in terms of realizing more of its potential.
How does that translate into credit markets? You know, we've seen obviously a strong rally across different asset classes. You know, Brazil FX has done extremely well in the context of the rest of the facing pressures.
On the credit side, you know, we were seeing basically Brazil credit spreads trading in line with double D peers heading into the election. You know, Brazil has a lot of positive aspects to sort of its credit profile, very strong sovereign credit balance sheet in terms of lots of reserves, not a lot of hard currency external debt. But it has lost investment grade several years ago.
Following the result, we've seen Brazil now sort of trading in between double Bs and triple Bs. So the market's starting to say, you know, maybe there's a light at the end of the tunnel here for Brazil to be, you know, moving back up towards eventually investment grade status. Markets, you know, obviously tend to get ahead of way ahead of the rating agencies.
So not saying here that this is anything imminent in terms of rating actions by any means. But the optimism that we're seeing on the credit side is one where hopeful that the trajectory may be turning in terms of, you know, having stabilized around the double B level credit. Maybe there's a path towards moving back up again.
So with that, that brings us to the end of our JPMorgan at Any Rate Emerging Markets Focus podcast. I want to thank Ineska and Mike for joining today. I want to thank you 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 JPMorgan Research Reports related to its content for more information, including important disclosures. 2026 JPMorgan Chase & Company All Rights Reserved.
This episode was recorded on the 8th of October, 2026.
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