EM Fixed Income: Mid-year outlook, amid a moving target backdrop

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 Aneška Hristova, Head of EMEA EM and LATAM Local Market Strategy here at J.P. Morgan.

And I'm joined by Ben Ramsey, Head of EM Sovereign Credit Strategy, and Tania Escobedo, our LATAM FX Strategist, both at J.P. Morgan. Ben, thanks for joining.

Thank you, Aneška. It's great to be here. Thanks, Aneška.

Hi, Tania. So we published our mid-year outlook about three weeks ago now. And since we published, there have been two significant innovations impacting on our markets.

First, the US and Iran signed an interim agreement. And second, new Fed Chair Walsh presided over his first policy rate meeting. So in this podcast, we will discuss the implications of both of these developments on EM fixed income.

And we will also share feedback from our mid-year marketing, having discussed the outlook with many of our real money and hedge fund clients. Finally, this is also our first podcast since the Columbia presidential elections last weekend, and we will share our outlook and thoughts on Columbia as well. So Aneška, let's start with you.

So how are you weighing these two new developments that you mentioned? First, what seems to be a positive resolution? Let's put that in quotes, because we know this has been a very volatile theme throughout the census and really since the end of February.

But what seems like a resolution to some of the energy market pressures, but we have the same time, obviously, a hawkish Fed. What do you think are the implications here for EMFX and for local rates? Thanks, Ben.

So we did one positive and one negative innovation into EM fixed income. So let me kind of set the stage in turn. So following the interim agreement between the US and Iran, it appears the traffic in the trade is resuming to a larger degree.

We were already seeing some resumption in force even before the interim agreement. Our commodity team was looking at over 5 million barrels per day flow through the trade even before the deal. But since then, certainly it's increasing.

And our commodity analysts have now revised their oil forecasts lower, essentially looking for, I would say, pretty much full normalization into next year with average price forecasts right where we started. So in terms of our outlook, energy prices are certainly meaningfully lower. In the outlook, we assume something closer to 100 per barrel as an average, and obviously market is now trading in low 70s dollar per barrel.

So that has been a significantly lower energy price assumption. Now on the Fed, definitely a hawkish innovation there. At some moment, the peak pricing was around just over two hikes, marginally over two hikes.

For the Fed now, thanks to oil prices, the front-end pricing has come down to about 36 basis points today of Fed hikes. But I think because we have the innovation of the oil prices there to really understand how much hawkish innovation from the Fed has been to our markets, we like to look at 10-year yields and splitting them into real and break-even rates, because it allows us to see the innovation in terms of the net hawkish impact. So if you look since early May, when we think the market started to anticipate a hawkish Fed, 10-year U.S. real yields are about 30 basis points higher and break-even rates are about 30 basis points lower.

Now actually, what we've proven in the past, that's kind of the worst combination for EM fixed income, real rates higher, break-even rates lower. So where does it leave us? For EMFX, we turned more constructive in our mid-year outlook, having been neutral since early April.

And certainly thanks to the Fed's innovation, which has dominated the lower oil prices in terms of EMFX specifically, we've seen some underperformance. Not material underperformance, I would say. And in fact, in some of the currencies that we tend to favor a bit more, we've just gotten to levels just where we turn constructive, but certainly some underperformance.

Now when we look ahead, I think the constructive view still makes sense. Some of the Fed repricing has already been reflected in EMFX levels. With lower oil prices, we think the cyclical outlook remains strong.

BOP outlook is now better. And I think what our positioning indicators tell us is that positioning has been meaningfully reduced through the Middle East insurgency and Fed pressure. So I think overall, when we combine these factors, I think our constructive outlook is still well grounded.

Now in terms of EM local rates, that's the asset class we've been a bit more neutral on and paradoxically, that has outperformed since our mid-year outlook. So with the Fed hawkish innovation, actually, it's been a flattening move in US rates. So the long end has performed better.

And oil prices have been a very significant positive innovation. So we've seen GBI EM yields lower by about 20 basis points. So that's outperformed compared to our expectation.

And we also switched a little bit more constructive in some outright trades. But I would still say for EM rates, we feel that there's a lot of moving factors, a lot of volatility that can still upset us when we think about interaction of hawkish Fed, resilient cyclical backdrop, sticky inflation, but lower oil prices. We still think it's a relatively more difficult directional environment.

And we need to be more focused on specific countries. So as you mentioned, we've been doing this mid-year outlook and doing meetings around it. And it's always a tricky one because we try to have some medium term perspective and often variables shift underneath our feet.

And as we're discussing, that's happened this time as well. But what would you say have been the key points of discussion that you've been having in terms of the mid-year outlook conversations? Yes, so I would highlight a few points.

So first of all, I would say most clients appear to agree that the EM outlook is not constructive, but we've seen a lot more cautiousness to engage. And in fact, it appears clients have mostly told us they've been reducing positioning ahead of the Fed and after the Fed. I would say that our indicators confirm that.

So when we look at our EM client survey, which was out last week, we've seen a move lower in the FX and rate score. And actually, both of these scores are quite low compared to history. They're not at extreme lows, but I would say at rather low levels compared to what we normally get out of the survey.

So I think that collaborates the client feedback. In terms of the Fed, there has been, I would say, quite a divergence in views. And I think that's natural because we didn't get forward guidance.

But I think one thing that most clients agreed on is that the lack of forward guidance and certainly a hawkish shift is something volatility inducing for the EM space. So when we think about, let's say, carry to vol ratios, there has been feedback from clients that the forward-looking assumption on that with higher volatility is a bit weaker. Finally, in terms of our more, I would say, reflationary assumptions on growth and inflation, so stronger growth, sticky inflation, most clients have given us the feedback of a little bit weaker assumption on growth and also lower assumption on inflation than us.

So I think that that's probably the key points that stood out for me. Turning to you, Ben, actually, I have very similar questions to you because I think this is really at the core of the outlook and what we are dealing with. I am very curious, how are you weighing these two innovations, the developments in the Middle East versus Fed for credit markets?

I think at the end of the day, we probably have to be, say, we're a little bit less sensitive at this point to the repricing of the Fed. I mean, we've already been pricing in some hikes, right? So it's been sort of recalibrating this.

And I think what's been increasingly priced in hasn't really done much in terms of changing spread levels. If anything, if we look at spreads over the last month, we're still near the lows of the year, which is really, as we've been discussing on this podcast, near historical lows, 20-year lows. We did see spreads move a bit higher over the last week, but that was commiserate with the 10-year Treasury, with Treasury yields going lower.

So that rally in Treasuries, which was pretty much a function of another leg down in oil prices and sort of a better outlook for inflation there as a result, was met with a bit of stickiness in terms of prices for EM sovereign bonds, which meant that the lower Treasury yield meant somewhat higher spread, but prices not moving that much. Kind of seen this across different rating buckets. So if we're looking at it just from that sort of top-down way, it does seem to me that really it's the oil driver, which is a little bit more meaningful, but still not too sensitive to either one of these variables, to be perfectly honest.

Not as much as I think what you're seeing in your own markets. If we look at maybe just some country examples to give a sense, we do see some more moves within different countries, which seem, again, more sensitive to oil moves than to rate moves. So broadly speaking, a repricing higher of rates would put some more pressure on lower-rated sovereigns, worried that basically we could have higher yields and at some point maybe refinancing pressures.

If we look at two sub-Saharan African countries, Kenya, which is an oil importer, and Nigeria, an oil exporter, similar rate, as I mentioned. We've seen on the course of the month, as we've had oil prices come lower, basically Kenya spreads 26 basis points tighter. Nigeria spreads 26 basis points wider.

That combination had been moving in the opposite direction. In other words, Nigeria had been rallying with the oil price increase. Kenya had been coming under some pressure.

So a bit of a reversal, and again, really just tracking the lower oil move. So I think if we use that as one example and sort of, again, looking at the broad performance of spreads, it's a bit more on the oil side than on the Fed side in terms of sovereigns. That makes sense.

And would you be able to also share with us key points from the mid-year client discussions you have had? In which markets did you see most interest? Yeah, I think a general consensus is constructive, as you mentioned, at least in terms of top down market views, in terms of fundamentals for EM sovereigns, but not a lot of enthusiasm for valuations, as was mentioned, that things are just, most countries are really tight.

We've seen some of the more distressed stories over the last year or so, which did have significant credit premium move, significantly tighter. So I think that there's a sense of looking for opportunities, looking to be selective. I think on the technical side, here in sovereigns, I think clients are relatively well positioned.

I don't think that there's been, maybe on some names, a bit of reallocation, but if you look at that same client survey, we see sovereigns remained in overweight and actually ticked up a little bit in terms of the last survey. So I think it's not that there's positioning to lighten up in order to later put money to work, but I think that there is a sense that technicals are strong. There is a sense that inflows are coming.

And I think there's a sense that if we do get any pullback in spreads, it's likely to be an environment where investors are going to be looking to add. Thank you. And let's shift focus here a little bit more to an idiosyncratic topic, Colombia elections.

The election was held now almost a week ago. Tania, it's over to you here. Would you be able to talk us through the result and what are the key implications for local markets?

Of course, Ineska. So yes, the roundup was last Sunday and the official results have now confirmed that the right-wing candidate, Abelardo de la Espirela, has won the presidential election. The left-wing contender already conceded and de la Espirela is set to take office on August 7.

Now, this win is the result that the market participants were broadly anticipating, but there are some caveats to the outcome. First, the election was much closer than anticipated. Abelardo de la Espirela's lead over Cepeda was only shy of 1% when most polls were pointing to a difference of more than 5 percentage points, with some even putting it closer to 10 percentage points.

Now, the immediate implication of this tight result is that the new president's mandate will not be as strong as expected, and his ability to create solid and durable congressional coalitions to push for big changes might also be somewhat weaker than anticipated. Then on the other side, the results for the left also point to a strong and legitimate opposition that will likely be very vocal against any attempts to kind of weaken the social agenda implemented by the current administration. And all of this matters for markets because one of the biggest drivers of the current optimism is the willingness and the ability of the next government to implement swift and aggressive fiscal consolidation measures.

We are starting from a very difficult position in terms of the fiscal balances, with unprecedented levels of primary deficits at 3.6% of GDP in 2025, and an overall deficit close to 7%. So to turn this thing around, you do need governability, political coordination, and the willingness to potentially use a lot of political capital in this effort. Now, all of these considerations might be explaining the more tepid reaction we've seen in local assets since the second round of the election, with most of the good news having been incorporated after the first round, in our opinion.

So the Colombian peso is practically unchanged relative to levels pre-second round, and the nominal curve is on average around 20 basis points higher, and the IBR around 15 basis points lower, which is not huge if you account for the political transition. So I think this is evidence that from here, the next leg for local assets will come from more tangible plans announced by the government, by the incoming administration, and the perception of how feasible the execution will be, and the political viability of the plans going forward. We are biased to be constructive on local assets in Colombia, and we will be paying a lot of attention to the flight plan in the coming months.

Thank you. And that brings us to the end of this JP Morgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Tanja and Ben for joining today, and thank you all 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 & Company All Rights Reserved. This episode was recorded on 26th of June, 2026.