EM Fixed Income: Middle East conflict week 3 damage assessment for EM
The desk views the ongoing conflict in the Middle East as a significant stressor for emerging market (EM) fixed income, with potential for heightened volatility and risk aversion among investors. Per the full note from J.P. Morgan, the impact of geopolitical tensions is already evident in widening credit spreads and a shift in investor sentiment towards safer assets. The consensus among analysts suggests a cautious outlook, with a target range for EM fixed income reflecting these uncertainties.
What the desk is arguing
J.P. Morgan analysts assess the impact of the Middle East conflict on EM fixed income as of 20 March 2026, focusing on risk sentiment and potential spillovers. They caution that prolonged geopolitical tensions could exacerbate EM funding costs and portfolio outflows.
Where it sits in our coverage
Our internal consensus holds a cautious stance on EM FX given heightened geopolitical risk, with a firm-level spread reflecting mixed views. This aligns with J.P. Morgan's qualitative caution but lacks explicit target confirmation.
How other firms see it
No other firm commentary is available in this source. J.P. Morgan is the sole cited institution.
Key takeaways
01J.P. Morgan highlights EM fixed income vulnerability to Middle East conflict escalation.
02Geopolitical risk premium is expected to persist, pressuring EM currencies and bonds.
03Analysts recommend monitoring risk appetite and oil price dynamics for EM exposure.
Market implications
Continued conflict supports risk-off positioning, likely strengthening safe-haven currencies (USD, CHF) and weighing on EM FX. Higher oil prices may benefit commodity exporters but hurt importers, creating divergence.
Risks to this view
Escalation of conflict beyond current scope could trigger sharper EM selloffs. Conversely, a swift de-escalation could fuel a risk rally, reversing recent EM losses.
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 Krishnarova, 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. Hi, Aneshka.
So we are almost three weeks now into the war between the U.S., Israel, and Iran, and given really it's the only significant driver for markets, we're going to focus today's discussion again on how this is developing and what it is meaning for EM fixed income spend a bit of time on asymmetric or idiosyncratic opportunities, EM, which may be a little bit of a nice way of trying not to spend all of our time just thinking about this, and we do have a couple which we need to discuss in local and hard currency. Yeah, Jonny, so this may sound a little bit like a broken record, but how are we going to see the top down here, given we are in a regime of a high degree of uncertainty and markets seem to be having trouble trying to figure out where exactly we are and where we're going? So I think the bottom line for us at the moment is we are still staying pretty light in our views in local markets, EM currencies and rates, pretty close to home, but more negatively biased in EM credit.
So that's the bottom line, and maybe I'll unpack that a bit. So I think nearly three weeks in here, there's obviously a lot of debate about the military and political progress in the press. I think, unfortunately, you do have to take a view on it if you're going to take a view on EM fixed income markets, because either explicitly or implicitly it is driving what's going on in the markets outlook.
The assumption we're working with is that this is a conflict which is going to be somewhere in line with the initial estimates, which were four to six weeks. That means we're probably maybe halfway through, maybe closer to the end on that side. I think if you look at the military side of things, there's obviously been an enormous number of targets hit in Iran, the estimates probably getting towards 20,000 at this point.
And so I think you have to think that the future gains as we go through time are going to be diminishing for that. And to some extent, the military aim of sort of degradation of Iranian capabilities can be seen through that. But the major uncertainty is coming on the political aims, and these look a bit less clear here.
If we think about a world where U.S. and Israel stop strikes and leave straits of homers in de facto Iranian control, then that could be a strategic problem and markets will see it as unresolved. And I think that's why markets do have that residual tail risk that this may have to go on for longer. So I think because of those risk scenarios, which they are real, even if they're not the base case, that this goes longer and we end up in this tail risk where we have a very high energy prices for an extended period, which could tip you into a global recession as purchasing powers hit and rationing of energy and you get an inflation spike, which would accompany that, which complicates things for central banks.
Because of that, I think that's why we're maybe staying a bit light. And also, if you look at the daily tracking, which we do of military activity and energy flows, it's not really yet showing that we are getting to a turning point on that. So if the base case that we assume happens, then this should be a world where we'd be looking to add back, particularly into maybe in currencies.
It would be one of bending, but not breaking on global growth. Inflation would be, you know, something which is around for a while. And you can see the way central bank pricing has been repricing significantly across both the EM and EM.
If you look at on local markets, actually, there's been decent price, decent, not decent price action, the opposite, decent weakening, sometimes panicky price action. And I think you have to say levels are becoming more attractive, you know, six to seven percent weaker in the worst hit EM currencies, over 100 basis points and rates in many of these positions reduced as well. If you look at our EMFX risk appetite index, it saw the largest two week decline ever.
And that goes back to 2010. So included with COVID. But I don't think we're there quite yet.
And so we are pretty close to home in local. Looking at some asymmetries and adding in places like that, I think in credit will come onto it, I'm sure. But, you know, spreads just haven't moved too much yet.
Only about 16 basis points in sovereigns, nine in corporates. And so I think you have to have a bit of a negative bias there because risk premium is just too low, it seems at the moment. So that's how it looks top down.
Aneshka, maybe let's drill a bit into local markets here. We talked a bit actually on last week's podcast about how some of the outlook is diverging a bit here for EMFX and rates in terms of the way inflation can impact. Is there any lessons that you've seen or looked at from previous energy spikes that can maybe tell us about both of those asset classes, about whether we need to be concerned?
Should we be fading these moves? And how does that look across rates and effects? Right.
So on last week's podcast, we already mentioned that when we look at real oil prices, they are still not very high in a historical context. And therefore, for instance, the growth impacts can stay manageable or tolerable, while the inflation impact, which relies primarily on the percentage change in oil prices, would be more dramatic or more important. That can still change.
Obviously, with higher oil prices, we might have to reconsider the growth effects. But broadly speaking, our economist revision so far have been aligned with this view. Now, I would also want to highlight our economists here in EMIIM have also published very interesting charts on country basis of energy intensity of growth and energy shares in CPI baskets.
And it actually shows quite interesting divergences. For instance, South Africa ranks with a relatively high energy intensity of growth, but low weight in the CPI basket. And we have some other currencies or countries with the opposite mix, where you'll see low intensity in growth, but actually quite high shares in CPI baskets, Poland and Czech Republic are on that side of the spectrum.
So, that could be some very interesting idiosyncratic divergences in the impact. Now, in terms of the historical analysis, we looked at other supply shocks. I would be cautious to use the word comparable, because at this moment, we know that this supply shock is larger than any in recent history or the history that we have very good data for.
But if you look at comparable, not comparable, but other supply shock episodes, we've looked into a pre-GFC episode where Nigeria and Iran had some disruptions. We looked at the Arab Spring and we looked at the Russia-Ukrainian start of that war. And very interesting lessons emerged.
So, the first one is that the impact on rates is quite persistent in the first several months. So, the sell-offs in rates are quite persistent. We also notice generally flattening bias.
That flattening bias is clearer to see in, let's say, strews spends. It takes a little bit of time in one strews that might take up to five months, but it is a flattening bias. So, I guess that the experience right now offers some contrast.
Two stands have been in general flattening, but one strews have aggressively steepened across the board, across the world. So, that's something that stands out against the historical experiences. For FX, it is very interesting that actually no consistent reaction emerges out of this historical comparison.
In some episodes, EMFX weakens. In some episodes, it strengthens. It seems that the general dollar environment is more important.
As I mentioned, none of the supply shocks are as large as now, so that obviously provides some bias. But I still think that this historical analysis gives us a little bit of perspective that rates is probably more vulnerable than FX on average. Thanks, Ineska.
So, we've outlined in a note today, you also wrote yesterday, you know, really saying it's maybe still too early for wholesale risk additions, but we are starting to look at places where there are asymmetries or idiosyncrasies that we can re-engage with. We've obviously talked for many months about the Hungarian elections, and despite all of the noise which is going on in the Middle East, obviously, those are coming up in April. So, is that something you think we should be paying attention to, even given all of the uncertainty and exposure that Hungary may have to high energy prices?
Indeed, we think so. Now, the timeline here is quite short. The election is 12th of April.
That's not very far away. I would expect now that idiosyncratic risk to start dominating the price action for Hungary. Obviously, we cannot forget about the energy backdrop.
That will be very difficult. But investors might have options of how to express that view, and at the same time, but not particularly heavy exposure to the energy backdrop. Regional relative value expressions or option expressions are available.
I would also say that compared to the Russia-Ukrainian episode, we know that Hungary is somewhat more exposed to energy prices than the region, but the situation is in a better starting point in terms of current account, real yield. So, I think the options of expressing this in a relative value play are there, and they have a good basis to provide effective hedge. Other things I would highlight that investors may look at is linkers as an asset class in rates that should have a better performance in this environment.
The final thing that we are looking at, which goes back to the point about trying to find asymmetries, is in FX specifically, we have countries and regions with generally more interventionist policies. Those interventionist policies are quite interesting because they slow down the market price action. So, at this moment, we have space that has reacted quite heavily with a large beta, and we also have options in FX where we have currencies that have not reacted particularly dramatically because of the authorities stepping in in some way.
And that also provides a basis for relative value expressions with asymmetries. Great. Thank you.
So, Ben, let's turn to credit here. We've finally seen some limited spread widening in EM credit, although at 16 basis points since the conflict began, it still seems pretty low, although we are at the widest point in the last few weeks. How have your own thoughts about EM sovereign credit been changing or not as we've moved through this period?
Yeah, Johnny. We are closing yesterday with a spread of 275 basis points on the EMB Global Diversified. That is a bit of a wobble.
I mean, it's the widest we've been actually in four months, but really, valuations are still pretty expensive on spread terms. If we put some context here, we've been under 300 basis points since July of last year, and prior to that, we hadn't been under 300 basis points for a sustained period since 2017, 2018. And we're still well below the 2022 episode of the invasion of Ukraine by Russia, at which point oil, of course, spiked, and at that point, the EMB spread reached nearly 600 basis points.
So, from that point of view, it still feels like we're a bit asymmetric here in terms of where spreads can go, and we have been maintaining a cautious stance. What I would also highlight here is that yields are actually moving considerably higher. So, and why, of course, because we've seen treasuries sell off, so treasury yields are moving up, spreads are widening, and so the all-in yields here that countries are facing are moving higher, and so that means returns have been quite soggy.
The EMB, global diversified yield, is now above 7% for the first time in quite some time, and that's about 50 basis points off the recent low. I think we're at a point here where we have to start worrying a little bit about what those yields could mean for the lower-rated, more sort of frontier credits, the ones which have, for the first time in a long time, really have had ample access to the market again, but if we do go back to that 2022-23 period, we're effectively priced out of the market. The yield on the single B component of the EMB, global diversified, is 70 basis points higher.
That's at 8.3%. Historically, that's really pretty low. That's not really a warning signal for us.
We need to get sort of above 9%, 9.5% for us, I think, to be a bit more worried, but I think it's starting to be a little bit of a caution sign. If we look at a country like Argentina, which probably had a window to issue, come back to markets for the first time in a long time, refrained from doing so. The finance minister just this week said that they didn't intend to come back to markets, and they reiterated that and said that they would have alternative financing sources, but if we look at the yield on some of their bonds, they're well above 10% again now.
You could say that window for an Argentina at the moment is shut, so I think we do have to be a bit cautious here. If this is a prolonged move and we do move higher, we could have some repayment risk coming back into the picture for, again, the sort of lower-rated, more risky solvents. Let's turn to maybe some idiosyncrasies, and there is one country in sovereign credit which has just completely outperformed in this environment.
That is Venezuela, where if you look on a spread basis, we're about 1,100 basis points lower over this period. Could you update what's actually been going on in the country recently, whether you think this is justified by idiosyncratic developments? Some of the global offices could be linked and is linked to what's going on globally as well.
Does that all justify bonds trading above $0.50 on the dollar at points this week? I think we have to start by putting $0.50 on the dollar in perspective. Venezuela has been in default for nearly a decade now.
Those bonds have high coupon payments, so there is a considerable amount of past due interest. So, $0.50 on the dollar of principle actually corresponds to something like low 20s, mid 20s, even at this level in terms of total claim. In terms of what's at stake, I think you can still, if you look at it from that perspective, justify that there's been some importance moves higher in terms of bond prices.
Now, from a big picture point of view, I think this conflict has really put into relief the idea that in terms of strategic access to some of the world's largest oil reserves, Venezuela's importance to the U.S. and within the Western Hemisphere has been really emphasized by the conflict. I think if we look at the ongoing direction of travel of U.S. policy developments towards Venezuela, we've seen now formal recognition, legal recognition of the interim authorities under Rodríguez. That had been a question mark up until last week.
We've seen ongoing licensing with the U.S. making the effort to emphasize that they are encouraging investment and more oil production in Venezuela. So I think on that front, basically we still see this effort driven by the U.S. to improve the situation, improve basically the oil sector first and foremost. What have we seen locally?
I think we still have big question marks in terms of the timing of what a political transition may look like. There's been a cabinet shuffle this week, which has been quite interesting. The defense minister, who was the head of the armed forces, who had been there for a long time, has retired, is now out.
He's been replaced by the former intelligence head. So I think there's a lot of sort of criminology going on trying to figure out what that means. If anything, the IMF addressed Venezuela in its press briefing yesterday.
Seems we still have relatively limited interaction between Venezuela and the IMF. There's going to be hopefully some effort to at least have the IMF get involved on a technical level and improve data collection. But there's not yet any clear signs that the IMF is going to be involved in sort of its traditional way.
There's no clear signs yet that the IMF would be engaging Venezuela with a program at the level of the IMF that U.S. recognition has not yet translated into recognition of a government that would unlock some frozen assets, the SDRs, and could sort of pave the way for more formal engagement. So I think we're still at a point where even if the oil sector is being emphasized, there's not yet a clear sign that the Venezuelan authorities, the U.S. authorities are prioritizing pushing forward debt restructuring. Great.
Thanks, Ben. And that brings us to the end of this J.P. Morgan At Any Rate emerging market focused podcast.
Thanks to you Anoushka and Ben for joining today. And thank you all for listening. We wish an Eid Mubarak to all those celebrating, 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 J.P. Morgan research reports related to this content for more information, including, importantly, disclosures. 2026 J.P.
Morgan Chase & Company Rights Reserve. This episode was recorded on the 20th of March, 2026.