EM Fixed Income: Navigating choppier seas with a temperamental compass
The desk posits that emerging market (EM) fixed income is facing increased volatility due to shifting macroeconomic conditions and geopolitical tensions. Per the full note from J.P. Morgan, analysts Jonny Goulden, Arindam Sandilya, and Anezka Christovova highlight that recent developments have created a challenging environment for EM assets, particularly as central banks navigate inflationary pressures and growth concerns. The commentary notes that the recent uptick in U.S. Treasury yields is pressuring EM bonds, with spreads widening as investors reassess risk. This backdrop suggests a cautious approach to EM fixed income, especially as the market grapples with potential rate hikes and geopolitical uncertainties.
What the desk is arguing
J.P. Morgan's latest assessment of EM fixed income indicates that market participants must navigate newfound turbulence stemming from both economic and geopolitical uncertainties. The firm emphasizes the importance of identifying supportive macroeconomic indicators, which could provide some stability amid the expected choppiness.
The analysts argue that while there may be opportunities in select emerging markets, investors should remain vigilant regarding potential headwinds that could amplify volatility. The desk implicitly counters any overly optimistic views that may underestimate the impact of rising interest rates and geopolitical strife on the asset class's performance.
02Investors need to be cautious of geopolitical risks and interest rate fluctuations.
03Selective opportunities may arise, but vigilance is essential.
Market implications
As volatility rises, investor sentiment towards EM fixed income might wobble, prompting a reevaluation of risk appetites. This environment could lead to heightened scrutiny over bond issuers and potential shifts in capital flows towards perceived safer assets.
Risks to this view
The primary risks include heightened geopolitical tensions, further interest rate hikes by central banks, and potential credit downgrades among issuers. Each of these factors could lead to broader market dislocations in EM fixed income, adversely affecting returns.
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 Johnny 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 Arindam Sandilya, Head of EM Asia Local Market Strategy and Co-Head of FX Strategy, both from J.P.
Morgan. Aneshka, Arindam, thanks for joining today. Hi, Johnny.
It's nice to be here. Hi, Johnny. So, it's felt like a long week this week, and not just because I'm in Asia, and definitely meaningful moves in EM markets and a pickup in vol that we've seen.
I've been here in Singapore and Hong Kong, so it's a good opportunity maybe to look at a bit more at some of the currency moves in those markets which have been important generally and great to have Arindam with us for that as well. We also have a Fed chair announcement coming later. It looks like being reported.
It's not yet official, so we probably won't go into detail about that. So, if you're listening to this afterwards, that's why. But we'll also look to discuss generally what the latest developments mean for the rest of emerging markets and how we've been adjusting our views or not in parts of EM fixed income, given some of our shorter-term technical signals have been giving important signs.
Taking a step back to try and orientate ourselves, we've had an overall constructive view coming into the year on EM and focused on EMFX and all co-markets, driven by structure views about the EM currency cycle and resulting positive flows and views about a pro-cyclical global growth environment. Johnny, has anything changed with that in the past week, and has that overall picture been driving markets? Yeah.
So, I minded a bit of that Mike Tyson, the boxer quote that everyone has a plan until they get punched in the face, and that's because we spend a lot of time working out a narrative about the year ahead, structural and cyclical environment for emerging markets, and this last week or two's moves have been more volatile, headline-driven, and often quite technical, and so it's good to sort of check back whether anything has really changed about that plan and that narrative. It's generally not been that bad for emerging markets until the last 24 hours or so, but some of what's driving is not necessarily those factors that we have been outlying and it's felt we have really been getting into a lot of a tactical market, and we've also tried to be tactical in some of our views and adjusting, and that hadn't been working, but maybe it's starting to work a bit better in the last 24 hours or so. So, where are we?
Well, we've been outlining the case really since the middle of last year for this turn in the EMFX cycle to a more bullish cycle for EM currencies against the dollar. We had been in a 14-year bear market, and the idea is that that's going to imply reallocations of capital in the form of portfolio flows that would come back into EM fixed income currencies and bonds, and added to that, we had a view that coming into this year, it looks like a stronger growth picture, as our economists have been highlighting from second half of 2025 into 2026, we have tariff uncertainty fading, financial conditions eased quite a lot last year, and we've still got this tech capex cycle continuing, and all of that would be pretty positive for emerging markets, and I think generally, all of that is still tracking. I would say, having finished a week of meetings here, it all feels very consensus as well.
The themes actually over the last week, 10 days, have been slightly different, and they've been more about really an acceleration or interventions into what we thought is this sort of slow weakening of the dollar versus the EM and EM currencies, and the question of whether there is a more urgent need to avoid the dollar because of maybe institutional or predictability concerns. They were not really front and centre in the way we had thought about this mid last year, but they have been in the background and maybe growing in prominence for investors, given the sum of US policies and actions certainly coming into the start of this year. You've had quite a lot of volatility, Asia FX has been a key part of it, which we'll come on to, but actually, markets just continue to go up in EM and some of the inputs like metals prices for that as well.
It looked a bit frothy to us, generally very risk on price action to some extent, but it's not typical risk on, it's obviously being driven by those other concerns. Net net EMFX is up about 2% so far this year, bond yield a bit lower, credit spreads actually a bit lower as well, even though they're very tight. I think taking a step back, the overall environment still looks supportive in the medium term, but I think in the near term, we do need to navigate some of the volatility around these debasement themes that the market is talking about, and also markets that have some signs of looking a bit toppy here.
So Arindam, let's bring you in here and try and get a bit more into the weeds of what's been driving EM currency markets and Asian FX markets, which have really been in the centre of the last couple of weeks or so. There are a couple of strands to this. It felt that an immediate cause of some of this dollar weakness, certainly in the last week or so, has been coming from Japanese yen, Asian currencies.
Some in the market talk around a sort of Plaza 2 theme, the theory that somehow the US wants to coordinate a weaker dollar with other countries. That was talked about obviously last year as well. So maybe if you could just take us through what's prompted this kind of discussion now.
We've had a range of officials who've weighed in over the last week on this. Do you think this is something which really should be driving the dollar weaker versus Asian currencies? Yes, Jony.
I think, you know, there's always two sides to the story, and the markets are doing what markets usually do, which is weave together a fairly sensible post-facto narrative through price action. And I think there's an element of policy-induced appreciation pressures on Asian FX that cannot be denied. So, it started with the yen, as you said, late last Friday with this New York Fed rate check in an illiquid New York time zone that caused dollar-yen to plummet.
And that took a fair chunk of low-yielding dollar North Asia with it when markets reopened earlier in the week. Korea being the most prominent beneficiary of that yen move. In Korea, there was news earlier in the week that Korean authorities who've been worried about Korean won weakness for a period of time and that instituted several measures during the December holidays to rein in the won weakness had got together with particularly the National Pension Service, which has been known to take out somewhere between $30 billion to $40 billion every year.
It's been a drag on the Korean BOP for several years now. And there was news that apparently the NPS is going to buy $20 billion less. So overall, our read of that situation is that it's not a game changer, but if you are putting together narratives, then this is, you know, one more break in the wall in terms of policy helping to, at a minimum, stem worst violation FX weakness, but in the baseline actually promote some strength.
Since Dollar Credit had a rapid move lower intra-week before reversing some towards the end of the week. One currency that has had a very large move over the past several weeks, almost like a knife slicing through butter is dollar ringgit. We've broken below 400 the figure that was in Hong Kong last week, meeting maybe some of the very same clients that you read, Johnny, this week.
And one question that came up in some meetings was, what is the central bank going to do with respect to FX? If you encounter 400, well, we know the answer now, which is nothing. And this kind of policy permissiveness perhaps also owes its roots to, you know, some sort of agreement that may or may not have been had with the U.S. back in October 2025.
And President Trump and Secretary Besant visited the region. At that time, there was reports of Malaysia and Thailand signing these FX accords with the U.S. The exchange looked extremely boilerplate related to non-intervention.
But looking back at the price chart of dollar ringgit, the down move started right around then. So you could, looking back, say that, you know, there's been a policy element to how Asian FX has behaved. But having said that, I think, you know, having seen how the big move in dollar Taiwan and dollar Korea back in May and June of last year did not stick, right, I think, you know, for us, it's a bit of a stretch to say that this is a Plaza 2.0 replica where there's sort of a multilateral or at least a coordinated bilateral agreement with a bunch of Asian central banks to do something on FX.
And if you talk to clients, I think one thing that comes up over and over again that militates against this thesis is that back in October 25, when the U.S. visited the region, there was almost a fork in the road moment when the head of trade deals that was signed at the time, the U.S. could either have asked for investment dollars into the U.S. or they could have asked for a shift in FX policies. And as we know, the U.S. went ahead and signed their trade deals with Japan, with Korea. And the centerpiece of those deals was more Korean and Japanese investments into the U.S., which to us suggests that the choice has been made.
It's investment dollars over FX. And what we're seeing right now has an element of correlation with what's happening in Japan. That policy is probably not the principal driver of what's happening in FX.
Great. Thanks for that. That's a really useful sort of overview of where we are.
Is there anything else maybe to delve into different currencies specifically where we have country-specific drivers? You talked a bit about, you know, Ringit going through key levels of four. We've also had some stock market weakness in Indonesia.
People talk about the Thai elections coming up. We've had a monetary policy meeting in Singapore this week. So maybe a wrap-up of where you think some of the other more idiosyncratic drivers are.
Yeah, I think, Johnny, that's exactly right. The way we have been describing the Asian FX landscape is that it is bottom-up idiosyncratic and divergent. And maybe there's a bit of a common story in North Asia, but South Asia certainly it's just a bunch of country-specific dynamics.
So in Indonesia, for instance, this week we were shocked with this MSCI news that came out about them considering declassification of Indonesia in the EM index and potential reclassification because of concerns around cross-holdings and transparency in the Indonesian equity market. We saw 15% drop in JCI over 48 hours, which has reversed some today because there's been a policy response to this. So Indonesia is kind of idiosyncratic in its way.
Indonesia has been in a similar camp to Indonesia in terms of pressures on the FX, but for very different reasons. There's almost a buyer strike on Indian equities at the moment, and we are bleeding outflows from India at a time when most of Asia, especially in the north, is receiving enormous amounts of inflows and EM equities as an asset class, which we track quite closely in Asia given how much of our North Asian equity FX complex is linked to this, has received a very healthy amount of inflows to start the year, well ahead of what our equity analysts were expecting. So to see India lag on that front is a bit of a gut punch.
In Thailand, what's changed, you're right, there's an election around the corner, but what's changed very visibly for us is the Achilles heel of Thai FX management for the longest period of time has been the inability of the central bank to engineer, I think, what we think to be much-required FX weakness because the economy is in a very soft spot. We think that the Thai baht is overvalued and certainly needs some help from the policy side to correct that overvaluation. Policy resistance has stepped up based on weekly FX reserve data, which I think is for the better.
And so it's behaving differently, for example, from the other surplus Asians, call it Rangit, Korea, China, and so on. So divergence even within the surplus Asian block. And then finally, we had a MAS meeting this week.
A segment of the market had anticipated MAS as one of the potentially earliest hikers in the region to tighten policy as soon as this meeting in the event they didn't do this. The statement and the forecast changes were all in a hawkish direction. Jake Morgan called for the next mass policy change is in April.
There was a call going in, so economists were proven right. But having said that, policy tightening in Singapore tends to promote SING strength, but already the SING near is trading towards the upper end of the band. The forward on SING near is through the band, and we don't think the risk reward is there to be wanting to play SING from the bullish side, and therefore we are positioned quite the other way.
So SING is one market where I would say there's a very active discussion amongst clients in terms of the direction of views, and there is considerable dispersion on just which way to go. Great. Thanks for that.
So, Aneshka, turning to you and coming back to this feeling like we've been punched in the face, let's talk a bit about short-term signals in the market. We actually reduced some of our FX views last week, as we discussed in the podcast as well, in the middle of what was another leg up in EM currencies, left us feeling like we've missed some decent moves there. We did put something out last night where we subtitled it Navigating with a Temperamental Compass, where we sort of tried to take a bit more of a thoughtful look at some of these technical overbought signals that we've used to guide our short-term positioning.
So maybe you could take us back to, you know, why did we reduce some FX views tactically? How are you assessing that against a market which didn't respond immediately, which we often see it do, it kept rallying, but maybe now is seeing a bit more volatility? How do you consider that?
Where do you think we're going from here? So indeed, we took a risk off from EMFX from our portfolio last week on the signal that our favorite indicator, the EMFX, which is the appetite index, went into overbought territory. We got actually a really high reading on that index, and that made us neutralize risk.
Now we've been quite lucky that in the past 10 signals, they have all been very profitable and worked straight away. And this time it didn't. In fact, the drawdown we have on the sell signal is one of the sharpest that we've ever recorded on the signal.
So it went the completely other way. Now, we've done an analysis and we've published it, and there are some very interesting conclusions on the unsuccessful signals from the EMFX risk appetite index. So let's assume that we are now in one of those that don't eventually deliver a positive total return on the idea that the market is overbought.
In general, the EMFX risk appetite index, the last 10 signals have all been a positive return. Through the whole history we've been running this index, since the start of 2010, about 80% of signals are positive. But we looked at the 20% that are not positive.
And what we found out is that rather than these unsuccessful signals getting wrong that the market is overbought, they only get the timing wrong. So they get it wrong by about, let's say, three weeks on average. But they still predict that there would be a sharp correction in the market just a bit later.
Additional thing we found out is that the extreme reading that the risk appetite signal, the very, very high reading, is actually a feature of these unsuccessful signals in getting the timing wrong. It looks like that once we get that extreme reading, which in the index is something about 2.9, 3, above 3, it takes a longer time for that positive momentum to be knocked back. When we look at these signals, we actually only found one that got the market really wrong and that the market continued to rally.
The unsuccessful signals otherwise just got the timing wrong. So that will tell you that at this moment, we should just stick with the plan that at this moment, the market is overbought and extremely consensus. I would agree with you, Jonny, that there is generally a sense of consensus across the conversations I've had over the past two weeks.
If I may highlight the main points of consensus and the vulnerable assumptions, therefore, the first one is there is a broad idea that we are in a very strong cyclical environment. But at the same time, we know that the JP Morgan easy indicator is an extreme level and usually from these levels, we see some mean reversion. Another very consensus assumption is on the continued rally of and fundamentals for commodity prices, especially precious metals.
Well, we don't have a strong view there, but it's not a market that has very strong anchors and we have to watch the volatility there. Second assumptions that are very entrenched is the asymmetric policy bias of the Fed. That's again something that we'll have to think about.
And the final risk that we obviously have to watch, but again, it's very hard to have strong uses geopolitics, which definitely has come back to the market attention over the past week. Now, the amount of times I've been asked over the past week, is this time different? Are we in a completely different environment?
And to some extent, that's a bit hard to dismiss because we ourselves have argued for a cyclical turn in the MFX. If we do get a really the environment that we have, let's say from 2002 to 2008, the drawdowns in the MFX become much less frequent and much less severe. And obviously, we cannot completely dismiss it.
So on the margin, it kind of this idea, this time might be different. Well, it might make us a little bit more bullish on some currencies. But broadly speaking, the analysis I've done, I think the MFX risk appetite index still has some important lessons for us here and should keep us very cautious in the near term.
Great. So let's maybe finish with thinking about what that means for EM rate markets as well. Not just that, not really that signal, but more about what these currency moves might mean.
I guess EM central banks probably hadn't thought about very strong currencies this quickly coming into the year. Obviously, it can help reduce some inflation. We had been otherwise describing a multi-year disinflation process, which was sort of coming to an end here.
Is this been impacting EM rate markets, markets pricing in more cuts? Has it been impacting monetary policy at all? Definitely.
That's a new theme that is developing. People over the past month noticed a lot more reactions or direct reactions to the currency strength. I will here focus mainly on EMEA, YEM and LATAM, where this is a relatively new feature for us.
Obviously, in Asia, attention to currency levels and the frameworks of currency a lot more developed. What we've seen in EMEA, YEM and LATAM is a number of central banks starting to react a bit more. A surprise cut in Israel, we associated it with currency strength.
And actually, we've now this week seen reports of exporters starting to highlight the currency strength as an issue and the central bank having to speak about it more directly. Elsewhere, we've had a surprise cut in Uruguay, which we believe was also likely driven by the currency strength. Elsewhere, we've seen other reactions such as reserve accumulation becoming part of the framework again or just simply larger volumes of FX intervention than we would have seen previously.
So, certainly, the currency strength is coming into the central banks' frameworks and they need to react. What we think is we are here in a period where many EM central banks are still having very high real yields. And I think that should bias the policy reaction more towards monetary policy action rather than something directly on the FX market.
I think that's the more easily tradable view as well. For instance, yesterday in South Africa, we've seen reaction to the currency and our economists brought forward the forecast for a rate cut into March. I think these are the reactions that are more tradable and it makes us a little bit more constructive on rates in these regions.
Johnny, can I add a couple of points from Asia on this very sort of angle? It's come up in our client conversations as well. Please do.
Yeah. So, the first thing to note is Asia, because there's a phase difference between the way me and Latam are behaving versus Asia in terms of our inflation cycles, whereas we are starting to see downside surprises in inflation in other parts of EM. In Asia, our negative surprises have just ended now.
And what we're starting to get is a series of small upside surprises, right? So, there's nothing here to say that we need to tighten rates imminently, but at least the period of a very dovish bias in terms of monetary policy, I think, is behind us. So, that's point one.
Point two is that particularly for the North Asians, which have this prime mover of the AI cycle behind the tech exports and which are in the early stages of being redistributed to the rest of the soggy domestic economy via fiscal transfers, our sense is that the business cycle will overpower FX effects. And therefore, even though our central banks are not in any rush to tighten, for the most part, in 2026, maybe MS, some people say potentially even BNM in Malaysia, but the rest of us should be solidly on hold. What we're seeing in the IRS markets is that a substantial amount of rate hikes are now being priced over the next 12 and 24 months.
Some in the market have tried to fade this. Our sense is that that's a mistake. This is a feature of the next phase of the monetary cycle.
This is not a bug, and we should not stand in the way of this. Great. Well, thank you a lot to digest there.
And that brings us to the end of this JPMorgan, at any rate, Emerging Market Focus podcast. Thanks to you, Anushka and Arindam 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 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 30th of January, 2026.