EM Fixed Income: Is the coast clear after the Fed?
The desk suggests that recent developments might have cleared the way for a more stable outlook in EM fixed income markets following the Federal Reserve's recent policy stance. Per the full note from J.P. Morgan, this recent shift could catalyze investment inflows into emerging markets as volatility subsides and yields adjust favorably. However, specific consideration must be given to how market participants stratify their positioning as geopolitical tensions persist globally and affect risk appetites. Additionally, despite the positive turn suggested by the J.P. Morgan analysis, a measured approach is recommended given the substantial external influences that could disrupt the emerging market landscape.
What the desk is arguing
The thesis posits that the recent Fed decisions may have reduced uncertainty surrounding EM fixed income and opened avenues for improved performance. The podcast highlights that a favorable rate environment could drive renewed interest in these assets as yield differentials become more favorable for investors looking for returns outside traditional markets.
Supporting evidence lies in the observation that investor sentiment has noticeably shifted after the Fed's policy update. J.P. Morgan suggests that the recalibration of expectations around U.S. interest rates could push money towards EM assets, as evidenced by the stabilization of certain EM currencies in recent weeks.
Where it sits in our coverage
As of now, our consensus target sits at 1.075, with a range from 1.04 to 1.12. Specific target insights include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
This view aligns reasonably well with jpmorgan given their target, positioning us slightly above the lower end of the expected range. However, the overall spread indicates a divergence in outlooks, particularly with bofa on the more conservative side as investors weigh potential risks.
How other firms see it
Firms like jpmorgan are largely optimistic about EM fixed income given the recent Fed statements, while bofa provides a more cautious contrarian perspective. This juxtaposition highlights differing attitudes towards global risk and economic stability.
Key related economic indicators to monitor include the volatility in USD/EM currencies and the evolving interest rate narratives from major central banks which provide contextual depth to this thesis.
01J.P. Morgan suggests the recent Fed policy shift reduces uncertainty for EM fixed income.
02Investors are expected to show renewed interest in EM markets, driven by favorable yield differentials.
03Current positioning should account for geopolitical risks that could affect market stability.
04Differences in firm outlooks highlight a spread in expected EM performance.
Market implications
Investors should watch for a potential strengthening of EM currencies against the USD, particularly if U.S. yields continue to decline. Additionally, key indications of investor inflows into EM assets could signal a broader shift in market sentiment. This could be confirmed by monitoring the USD/EM currency performance metrics closely.
Risks to this view
A sudden uptick in U.S. inflation or a more aggressive stance from the Fed could reverse the current positive outlook for EM fixed income. Moreover, unexpected geopolitical tensions could significantly affect investor confidence, leading to volatility in these markets that could challenge the bullish thesis.
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 today by Aneska Kristevova, 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. Hey, Ben. Great to be here.
Great. So, guys, we're recording this podcast on an interesting day for markets, the day after we got the first Fed hike since 2023, the first move of the year after the Fed had been on hold since last December, and it's obviously the first move under new Fed Chair Walsh. So this move was widely expected after the hot U.S.
August CPI print last week, and that had followed a pretty strong August labor market report. You know, and this, alongside this really pretty sharp march higher in crude oil prices since the end of August, you know, that, of course, driven by what we've seen in more intensified conflict again in the Gulf region, you know, all that in this, that context effectively really shot up U.S. and core rates, you know, putting those markets under really strong pressure. We saw the 10-year Treasury moving rapidly up through 5% for the first time in almost 20 years.
So now, coming into today's session, which I noted could be potentially quite interesting, we're seeing that the realization of that Fed hike yesterday, even though it was widely expected as I mentioned, seems to be at least initially a stabilizing factor for markets. Of course, we're also seeing oil prices ease a little bit today as the market's kind of gauging the supply constraints in the Middle East. But in any case, the U.S. 10-year is back below 5%.
We've seen some flattening in the long end. The dollar, which had sort of knee-jerk stronger after the Fed, is giving back some of those gains and risk assets. Among that, I would include, you know, credit is opening up with a firmer tone.
So that's how I'd paint the picture here. Neska, let me open this up to you. What do you make of the Fed's decision from your side and this initial market reaction?
How in this context are you thinking about local markets? Thanks, Nestor. As you outlined, so the Fed has hiked.
Most commentators, including us, have interpreted the decision as a little bit more hawkish than expected. I think one element here is that the Fed really hasn't communicated as much as in previous times in history. So we still have that little bit of uncertainty if they are really going to deliver.
So that's one aspect that they actually delivered a unanimous decision. And obviously, there were then comments in the press conference and the dots changes. So that all combined in a direction, in a hawkish direction.
Now, most asset classes, our colleagues here at J.P. Morgan have focused on that being a positive for the market in terms of credibility. And even you mentioned the long end of the U.S. yield curve.
Now, for us in emerging markets, that credibility is a double-edged sword, I would say. Because we are, to some extent, a comparative class to U.S. assets. So actually for us, if the Fed was less credible, my conjecture would be we would have traded even better.
So, you know, it depends a little bit. Some nuances there between rates and FX, but if the Fed was not credible, actually, as a comparative asset class, we would have probably gained more versus the dollar, not less. Now, having a hawkish Fed hiking, I would say on balance is negative for EM, mainly through the EMFX channel.
But what we have to discuss here is both the degree of that, what is the degree of that negative impact, and second, whether we might be already pricing it already, whether we've already seen the peak effect of that. Now, on the degree, we've already discussed that on this podcast before. And I think the degree at this time is just smaller than in previous historical episodes.
I think the degree kind of comes down to variables like the balance of payments, positioning, real yields in EM, and the growth backdrop that is quite synchronized right now. So I think that decreases the degree of sensitivity. The second important question is, have we seen the peak pricing already?
Now, that's always a difficult question to answer. I think if we knew the answer to that with complete certainty, it would be very easy to trace. But in my own mind, I always thought that I think total of four hikes for the Fed would be the peak pricing, simply given what would it mean for how far is the Fed going to deliver above neutral rates, how much the economy needs tightening, also taking into account what our U.S. economics are writing.
I think that's an important point to think through, if this kind of pricing for the Fed is now sort of peak for the data that we have seen. So you've touched on this, and I like how you characterize the double-edged sword, especially maybe for currencies. EM effects have been pretty resilient to this broader pressure in core markets over the last few weeks, really only succumbing to this renewed dollar strength that we saw over the last week or so.
So how are you feeling about the hitherto constructive view you've held on EM effects? So I think partially the constructive view has been driven by the factors I've mentioned regarding the degree to which Fed hawkishness affects us. So the starting point for EM effects has just been better in terms of many variables, balance of valuations, balance of payments, positioning, real yields, growth, the whole package.
But another aspect that we cannot not mention here is that the recent repricing in EM effects has had quite large correlations to energy markets. When we crunch the numbers, it actually seems to us that that has been probably the dominant factor for effects compared to the Fed repricing. So obviously everything has had cross-correlation.
So when oil prices go higher, Fed pricing changes. But it seems to us that the oil prices played an even larger role than the Fed repricing. So another thing to answer here is whether the repricing in energy markets is also reaching some sort of peak point.
Certainly both oil prices and natural gas prices have now exceeded the guidance from our commodity team. So we are considering if that is another possible mean reverting force here. For EM effects, if that's the case, obviously, we can continue to trade resilient.
On the other hand, if there were to be more energy pressure, we could start to see more pressing concerns on whether the growth picture would hold up as strong as it has until now. The other thing for EM effects is that, again, we have seen a stronger performance in higher carry currencies. Higher carry currencies have been our favorite.
And that has really shown through in recent weeks. Again, the resilience has been in generally in the higher carry complex. And I continue to expect that going forward.
But let me bring Mike into the conversation to dig a little deeper on our views on the EM rate side. Mike, is there more risk ahead for the EM local rates as well as we've endured? Or do you think this may have run its course now?
Sure, thanks, Eska. I mean, I think the answer to that, we need to think about a couple of angles versus what's really been driving the selloff in EM rates. And in my mind, it's largely been that globally we've been replacing a more inflationary world and scope for central banks to be delivering more hikes into rising inflationary risks.
And what for the most part is still looking like pretty solid global growth. You know, when I look at, say, the spread of EM rates versus US rates, that spread is essentially unchanged throughout this whole selloff. But I guess the first point to make is that this doesn't feel necessarily like an EM specific sort of risk premium is getting priced.
This is part of a global rates repricing. And yet to some extent, I think the Fed decision yesterday is probably calming a few nerves, giving a bit of anchoring to the long end of the curve. If you look at the sort of one month moves in G4, long end rates and EM rates, we're kind of reaching the sort of momentum levels now where, you know, the selloff tends to subside.
And I think, to answer your question, how we endured it, you know, even in bearish rates environments, it's not a straight line up. If I look at previous examples over the last 16 years of EM rates and these kind of multi-month selloff periods, you only sell off on 55 percent of the days. It just happens to be that when you sell off, the rate selloffs tend to be larger than on the days when you rally where the rallies are smaller.
So I think everything kind of has a price. And right now, if the environment is still reflationary with a couple of kind of headwinds that argument that have been emerging in terms of concerns over AI and its sustainability or, you know, growth risks of energy prices stay this high, I think for the most part now, rates are at the sort of levels that where you can look at reflation and say that's quite fairly priced. So near term, I think we're probably in for a bit of a respite in terms of the rate selloff that we've been seeing in EM.
Right. And to continue with rates, can you talk us through how do you expect rates to trade the different risk scenarios that we now have to consider for the global macro backdrop? And where do you see the clearest relative value opportunities and the main risks across the different EM space?
Yeah, for sure. So I mean, I guess the starting point is we're kind of quite squarely pricing reflation now, right? If you look at what's priced in across EM, we have hikes across the board over the last month.
You know, apart from Brazil, markets have been pricing higher and higher and 27 policy rates. I still think the reflation is the kind of base case to be working with. I think in that world, the rate hikes don't get priced out.
That's probably the next natural step for all these central banks. I think what's interesting is to think about, you know, how can the distributions change around that base case? And I think we're living in a bimodal world is the way I would describe it.
So if you look at what's priced in over the next year and you try and infer a probability distribution of what's priced in using swaps and data, you can see that we're largely pricing two flat tails, a world where we're pricing more than four hikes over the next year and a world where we're pricing no hikes and the chance of cuts. And if I look at the month to date, we pricing and what's priced in, it's high across the board. But a lot of that has been a shift in the tails.
So, you know, the no hikes or cut scenario has been priced out quite sharply and that shifted into the hikes bucket at the four plus hikes bucket. So to answer your question, how do I think about the different risks? To me, it all boils down to what changes those tails.
Right. And I think the most obvious bullish risk for rates would be if we get a sharp collapse in energy prices, you know, if we get lower oil prices, lower gas prices. In my mind, this is a sort of world where a lot of what's priced in in the front end can start to retreat quite quickly.
So I would imagine you'll get bull steepening in this sort of world. I think it would be a kind of risk on world where high yielders outperform. I think on the flip side of things, the world is maybe harder to think through is a sort of stagflationary environment where, you know, the inflation headwinds coming from high energy prices intensify, where then we start actually seeing a spillover into what has so far been a robust growth environment into a weaker growth environment.
And this one, I think, is a bit more challenging to think through for rates. And I think that's where kind of there are some different paths that EM rates can take. I think for the lower yielders, it would be more that we price a growth slowdown and the hikes that are priced in would have to start getting priced out quite quickly after the delivery.
So, you know, if you look at previous stagflationary examples and energy shocks, that tends to be things like flattening of one year, one year versus one year. So you're not pricing rates to come low in a long time. You kind of you have the hike that they need to reverse course quite quickly.
But I think at the same time, the risk in that sort of environment, you know, we've been talking about this resilient EMFX environment up to now, if EMFX really starts getting hurt on weaker growth expectations, I think that's where the high yielders are more at risk. So I would expect more high yield underperformance versus low yielders in the region, also versus core rates. And with that, you can get a you can get steepening through, I think, where some of the premium gets priced further out the curve.
So I think here. We've been sticking with RV structures for the most part in rates, I think RV structures make a lot of sense. I would characterize the world we're in now and the kind of the forward looking risks, it's still reflation is the base case.
We're not at a big turning point in that story, but we do have to be kind of tactical around this framework. So I would think all of SQL, the risks are probably skewed to some bull steepening. Here in different scenarios that I've that I've been outlining, we also get some bear steepening.
And I think this also comes to the back of the fact that, you know, long end rates are higher globally, but actually over the last month, we've seen quite consistent flattening across 2s, 10s, bond curves across 10s, 30s. So, you know, I think given levels and given the recent price action, probably steepening is the next sort of move to expect in our in our markets. Very interesting and definitely could focus on RV structures there.
Let's switch over to credit and bring you back, Ben, back into the discussion. You mentioned Sovereign Credit has been actually firmer in the wake of the Fed hike. And you've been talking in this podcast about range bound spread.
Is there any change in your mind in terms of where EM Sovereign Credit spreads go from here? Yeah, thanks, Aneska. So, you know, as we've been discussing, spreads have been range bound at very tight levels.
This, you know, sharp move up in Treasuries and especially, you know, we've seen in the long end has translated basically almost one for one into yields, but not into spreads. So the spread has stayed stable. We sort of have gotten to a level of yield which has still been, I don't want to call it sweet spot because it doesn't feel so sweet when Treasuries are moving higher and overall returns are getting hit.
But it's a level where you still have, you know, basically high all in yields which keep the credit product attractive, even though spreads are narrow, but those spreads are not widening. You know, basically the market's not interpreting higher credit risk from what would effectively are increased borrowing costs because we're not yet at a level where that higher level of, you know, of coupon that the sovereigns would have to issue at. It has offset the improvement we've seen in fundamentals, more resilience in terms of macroeconomic policies, in terms of building buffers and in terms of taking advantage of the market access of the last couple of years to do liability management and basically push off some of the near term maturity.
So, you know, I think that's why we've had spreads not reflecting increased credit risk. I think if we, you know, the risk that we've been concerned about is if we, you know, basically see core rates and Treasuries continue to push higher and higher, then we do at some point get to a level which is going to shut lower rated sovereigns out of markets and make us worry maybe a little bit more about some of the more vulnerable or the sort of more fiscally loose fiscal double B credits, which, you know, do have to take into account that dynamics. If the Fed has, in fact, by delivering credit, building credibility, sort of put a ceiling here in terms of where where rates can go.
And if Mike's right, we're here in a reflationary world still, then I think we could be back in the universe where spreads could start to grind tighter again. So, you know, remains to be seen. Certainly the reaction of risk markets and of the sovereign credit in this sort of day one of the new post Fed hike, we're not seeing any aggressive rally, but certainly some stabilization and, you know, seeing, you know, credit spreads, you know, a bit tighter on the back of this, you know, notwithstanding the fact that we see Treasury, you know, Treasury's rallying.
So that is that is an interesting development. And I think there's a chance here we've seen an inflection point for this range bound period. And maybe we get back into a grind tighter mode again.
So thanks, guys. That brings us to the end of this JP Morgan, at any rate, emerging markets focused podcast. Aneska, Mike, great for you to join us today.
I want to thank everybody 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 JP Morgan Research Reports related to its content for more information, including important disclosures. 2026 JP Morgan Chase and Company, all rights reserved. This episode was recorded on the 17th of September, 2026.