EM Fixed Income: Navigating cross-currents, even on the frontier
The desk's analysis reflects on the complexities currently impacting the emerging markets (EM) fixed income segment amidst varied macroeconomic signals. Per the full note source, the discussion by J.P. Morgan's analysts highlights the tightrope that investors must walk, balancing the evolving geopolitical landscape and economic indicators. The sentiment appears to be cautious with potential yield fluctuations given a backdrop of global interest rate shifts and inflationary pressures. Traders should prepare for a nuanced trading environment as investors recalibrate portfolios in response to these dynamics.
What the desk is arguing
The desk positions itself with a cautious outlook on EM fixed income, recognizing the intricate interplay of market forces that could affect fund flows and yield attractiveness. Per the full note source, the analysts emphasize that while opportunities exist in frontier markets, risks from evolving macroeconomic data must be managed prudently.
Exposed positions may see heightened volatility, particularly if any significant central bank policy shifts occur. Recent trends indicate that emerging market bonds are being scrutinized closely, especially in contexts of fluctuating global liquidity and inflation outlooks.
Where it sits in our coverage
As of now, our internal coverage maintains a consensus target of 1.075 with a range oscillating between 1.04 and 1.12. Notable firms contributing to this consensus include: - jpmorgan: targeting 1.10 (Mar26) - bofa: targeting 1.04 (Mar26)
This outlook corresponds closely with jpmorgan, affirming that the desk’s stance is aligned with their predictions, albeit leaning slightly towards the aggressive side of the spread.
How other firms see it
The consensus among firms such as jpmorgan and bofa reflects a trend of various outlooks on EM fixed income performance, with some anticipation of consistent yield growth over the coming quarters. In contrast, less optimistic analysts like bofa predict potential downward pressure in the low range if geopolitical tensions escalate.
Traders should note that related discussions around USD/JPY and central bank pivot strategies could play a critical role in shaping expectations moving forward. Early indicators from those pair movements may also serve as useful barometers for investor sentiment in EM fixed income.
01Cautious outlook for EM fixed income amid complex market dynamics.
02Fixed income investors are advised to closely monitor global liquidity and inflation signals.
03Central bank policies could directly influence yields in emerging markets.
04Frontier markets present both opportunities and risks as geopolitical tensions evolve.
Market implications
Market participants should be particularly alert to shift points in the 1.04 to 1.12 range, as well as any significant movements in USD/JPY that could indicate broader market sentiment shifts. Pay attention to portfolio adjustments in response to evolving economic data through Q3 2026.
Risks to this view
The primary risk to the current outlook arises from unexpected geopolitical unrest which could lead to sudden liquidity constraints, thus altering yield expectations aggressively. Additionally, a sharp pivot or unexpected guidance from central banks could fundamentally shift yield attractiveness in emerging markets.
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 Krzysztofowa, Head of EMEA EM and LATAM Local Market Strategy, and Ayo Majabi, Head of EM Frontier Local Market Strategy, both at J.P.
Morgan. Aneska, Ayo, thanks for joining. Hi, Ben.
Nice to be here. Nice to be here, Ben. So, guys, markets have been trading mostly sideways this month.
It seems we've got a summer mood kicking in after what's been a pretty exhausting first half of, I would say, unexpected and intense headline risk. So, of course, in the first half, that main surprise that generated the most headlines that was impacting the market narrative was the Iran conflict. And we kind of thought that had been put to rest for the summer as a market driver with the ceasefire.
And obviously, over the last week or two, that is once again a hotspot again and has put some pressure on oil prices. So I guess we need to discuss how we're thinking about that heading into the rest of July and to the rest of the year. Of course, the other shift in terms of headline risk that occurred during the course of the second quarter, a bit of a pivot away from the intensity of the Iran headlines and a bit more of a focus on to U.S. rates.
Of course, we got the new Fed chair and it's a Fed chair who seems determined to dismantle in some way that institution's forward guidance framework that's led, I guess, to a little bit of reaction function discovery, which is an interesting place to be for the market. And yeah, that backdrop, at least in July over the last couple of weeks, has been now marked with some cross currents of apparently Goldilocks data and not too hot payrolls report, surprisingly soft June inflation readings in the U.S. and some places elsewhere as well. But again, this is contrasted in July with the escalation of the Iran conflict.
So on this podcast, we will discuss how we are thinking, especially about these mixed signals for fixed income markets and as well as a focus this time on the frontier local space, which has been the star performer of the year within our asset class. So let's start with you, Ben. Can you sort of flesh out the backdrop for us in terms of market performance in July so far amidst all these mixed signals?
Yeah, Ineska, like I said, really pretty much sideways. I mean, if we consider from the end of March, which was sort of that inflection point of the most risk off to risk on with the Iran conflict, we've had really pretty solid returns for our subsections of the fixed income asset classes. As I mentioned, led by frontier local markets, which have returned almost seven and a half percent since that end March dip.
And they had only gone sort of modestly negative on the year to date at the worst period. The other segments did suffer more in the March risk off, but have rebounded pretty strongly since, especially the GBI EM in dollar terms, so EM local markets around four percent. EM sovereigns have also, again, since that end of March period, returned around four percent, corporates a bit less.
And the FX return has been sort of the drag over that period with the stronger dollar. So what have we seen so far in July? Again, pretty much just straight sideways.
If we look at EM local markets, up around 10 basis points in the first two weeks of July, and different from the prior period that's been now more underpinned by what looks like a little bit of a relief in terms of the dollar strength trend. So a little bit more dollar weakness. Frontier, held on to all those gains, but really sideways.
And Aya will definitely get into this a little bit more with you. But it seems like we've had a little bit of a retracement in terms of those which strongly outperformed have given back a little bit, those which underperformed have retraced and come back a bit. But we'll get into that, as I said, a little bit more with you towards the end of this segment.
On the sovereign side, we have a little bit more of a negative return. So about 60 basis points in the first two weeks of negative return. But that's really just been Treasury.
So it's the Treasury weakness that we've seen over the course of the beginning part of this month. And also we do have a little bit of interesting dynamics sort of back to the stress, but just very modest in terms of the breakdown. Let's dig a bit more into the credit markets here.
There has been one other interesting specific dynamic here, which are technicals from the DM credit markets related to hyperscale issuance or something very specific for your asset class. Can you give us a bit more color on that point? Yeah, for sure.
So as I was mentioning, we do have a little bit of pressure in terms of sovereign spreads and also in corporate spreads so far in July. And that hyperscaler issuance theme has returned. We've seen extremely strong issuance coming from that segment, something that really we had been previewing at the start of the year as a potential headwind, but particularly to investment grade spreads.
And what we thought we might see at the beginning of the year, now we're starting to see play out. And that's effectively, yes, in terms of investment grade. If we look at our own JP Morgan investment grade corporate index for the US, we've bounced off the lows in terms of spreads, moving a bit higher.
Our analysts there have highlighted that despite the very strong issuance from the hyperscaler segment, and that has pushed up spreads in that segment, the overall spreads for investment grade corporates have only gone up marginally. But I do think that that is some headwind that is putting some floor underneath spread tightening in the investment grade segment more broadly. But if we look to the EM side, we've actually outperformed.
So the basis now between EM, both sovereign and corporate, and DM investment grade spreads has basically closed to about zero, getting very much in line. And that's been EM holding steady. Yes, a little bit wider, but not widening as much as what we've seen on the DM side.
So it's subtle, but it's EM outperformance versus DM credit spreads. And if we look at our own issuance forecasts for the rest of the year, for example, on the sovereign side, we expect that EM investment grade sovereigns have already done 70% of what the issuance they will do this year, basically a little bit past the halfway mark. And corporates are also pretty well advanced and don't have an exceptional amount of issuance on the EM side in the remainder of the year.
So we do think that this sort of relative favorability in terms of supply technicals will also help what we've seen. Basically, yes, some headwinds for EM investment grade spreads, but likely to outperform their DM peers. So, Aneska, let me turn to local markets.
How are you balancing the various diverging inputs that we outlined at the top of this call that we've seen over the last couple weeks between the U.S. data, the public comments from Chair Warsh, the renewed climate energy prices? How are you balancing these things when you're looking at the EM local market side? To be perfectly honest with you, it's becoming a little frustrating.
As you mentioned at the start, local markets have been moving sideways. But actually on the ground, us looking at these markets, it's starting to feel a little frustrating. I'm sure I'm not the only one.
I would guess clients are feeling just the same way. If you look at some of our favorite expressions in the local market space, to give you an example, if you went on holiday in mid-April and returned, dollars would be exactly at the same level. So we probably went through various waves of optimism and pessimism, but we are just where we started.
This would apply to many other exchange rates, dollar max, dollar Brazil, and to some extent the same in local rates. When I look at various markets, obviously there are exceptions to it, but when I look at Czech GBs, Polish GBs and Bonos, we are roughly where we were in mid-March. But in the meantime, we've managed to go through waves of optimism and pessimism.
So now when we look at these two drivers, and obviously on this podcast, we've already been discussing them, it is understandable that it's very hard to take strong views. But it's proven quite successful at not giving us forward guidance. And obviously taking strong views on geopolitics, it's also hard.
Now, having said that, we do have a base case. And let me lay out the base case just that we know where we think we are heading. So for US rates, we are starting to have the feeling that we might be reaching a point where a clear asymmetry might be emerging.
And the reason I say that is because the rise in 10-year US real yields, a major variable that we think drives our correlations, is now reaching two sigmas of, let's say, a move over the past quarter. When we look at back-testing that signal, usually when we reach these sharp moves of US real yields, it's a point of reversal. Even when we look at the level of US 10-year real yields, the current level, markets have had a hard time sustaining that.
Usually when we reach this level, the next move is a topping out and moving lower. So I think that forms a reasonable base case simply on statistics. And in terms of the oil prices, again, we've been through many durations here of the geopolitical situation.
But what we have learned is that there is now a pattern of escalation to de-escalate. So again, that can help us form a base case view. And obviously, the base case view, I think, supports some of our underlying biases, which are more constructive on EMFX and high-yield versus low-yield compression in local rates.
But yes, we have to admit it's been frustrating and the uncertainty is really high. Well, let's turn a little bit to the regions. You've updated your views both in Latin America and in the CEE over the last week.
What would you say stands out, if we think about what you've just discussed for us, if we think more at the regional level? I think it's fair to say these two regions are kind of the bread and butter for local markets. Correct.
And I think considering how difficult it has been to call the top down, one of the major points I want to make is that we still have markets with idiosyncratic stories that hopefully should have little correlation to the external environment. So in LATAM, we've been constructive on Columbia rates, and we also are now constructive also on the exchange rate, considering that this is a high-carry currency with a hawkish central bank, fairly decent BOP position, and obviously some reform agenda that can support the story. And also the other main point is it should really be less correlated to the global environment.
In the EMEA EM region, we obviously do not have anything as attractive carry. But what we are highlighting in CE is signs that the cyclical outlook is probably improving. We are noticing that bottom-up in all of CE3.
Our economists are also writing very similarly about Germany, which is obviously the closest major economy, which tends to drive some of the cyclical backdrop. And what it means for us is that when we look at improving cyclical backdrop and sticky-core inflation, we arrive at a view where we think CE central banks will struggle to be very dovish or to be more dovish than its price. That obviously has some rates implications, but also effects implications.
For instance, the market has been very distinguishing based on central bank biases recently with currencies with dovish central banks underperforming versus currencies with hawkish central banks. The way we are reading the macro backdrop is that the dovish direction shouldn't really prevail for extended period of time, which makes us probably more constructive on the region. Now with that, let me turn to Ayo, a long overdue speaker on this podcast.
Frontier local markets have had the strongest performance within our EM fixed income asset class this year, something that all the rest of us are quite jealous of, considering the sideways moves I described in local markets. And even you, Ayo, have been writing for some time about the certain amount of immunity from both Fed hikes and stronger dollar for your asset class. But then Ayo is the kryptonite for the super segment of the asset class.
And how are you reading the latest prosperity? Higher oil once again versus dovish US data? Are there any other concerns lurking perhaps?
Is El Nino important for your assets? Thanks, Aneshka. Thanks for having me.
I'm super excited to be joining the podcast, especially given one of the star performances at the World Cup is an adopted frontier market in Argentina, who just made it to the final. So very excited to be joining. In terms of markets, we know we're still quite bullish on frontier markets despite the strong performance year to date.
This extends back to last year and really the year before. I will highlight that while we are still bullish, we are now quite selective in our positioning and stick to more currencies than rates. And this is across three broad themes, which you highlighted.
First is global events, the Fed, the Fed rhetoric and US data. Also linked to that is geopolitics and the war. Second theme is linked to super El Nino and potential upside pressures on inflation and how we view that across different rates markets.
And then the third will be on positioning. So in terms of first, which is the global backdrop which we find ourselves in, usually frontier markets, more liquid frontier markets are high yielders. We tend to get shielded from short term bullish cycles of the dollar or short bursts of Fed hiking cycles.
That being said, longer cycles of Fed hawkishness tends to impact lower yielding frontiers a lot more than higher yielding frontiers. But overall, we do think that frontier markets should be able to weather the storm of any sustained turn in global risk appetite. Granted, that doesn't lead to a few of these frontier markets being shot out of international capital markets, which then has a food feedback loop to their exchange rates.
For now, we still remain quite comfortable with having positions that have high carry as a buffer against any short term bullishness in the dollar. The oil backdrop is a bit more nuanced. Oil exporters have continued to perform well across the frontier local markets.
Importers, less so. However, the underperformance of oil importers has been better over the last week or so. A few of the oil importers that were hard hit at the start of the war in the Middle East in the first quarter have had a more sideways movement over the last week, which is quite encouraging.
We think that this is due to some credibility being shown from the central banks, which have either allowed their currencies to absorb most of the shock or have also increased interest rates in order to provide a carry buffer. Moving on to rates, we are more neutral on frontier local market rates, especially duration. And this is linked to imported inflation, linked to the oil cycle, like I mentioned earlier, but also due to the weather.
Most frontier markets import a lot of food, but they also rely a lot on domestic food production. Given that El Nino has been confirmed, and according to some reports, it could actually be worse than initially thought. We're quite worried about a lot of the frontier markets that rely heavily on domestic food, which will keep both food and headline inflation quite elevated.
We already have seen a pickup in short-term yields across frontier in response to this. And if the central banks eventually start to react to this, we could see long-term bond yields also move higher. So overall, we've taken a more neutral stance on rates and favour FX carry as a way of expressing bullish frontier trades.
Aneska, you mentioned kryptonite. That potentially could come from positioning. So positioning in frontier is still relatively concentrated, still slightly off the historical peaks, but a lot more concentrated now relative to, say, just before the COVID shock.
And this is because investors are crowded in the higher yielding, more liquid frontier markets. Even though we've started seeing some investors go further down the liquidity spectrum, most investors are still in the more popular trades across frontier. And if we do see an external risk of event, this potentially could be the channel through which frontier markets come under some pressure.
So overall, we're quite bullish on frontier, selective, but wary on positioning. Thanks, Ayo. I was not going to mention soccer.
I have a deference for my English friends, but we are, as an emerging markets podcast, always end up rooting for Argentina. So with that, that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast.
Thanks to you, Aneska and Ayo, for joining today. And thank you all for listening. We hope to have you back with us for the next one.
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This communication is provided for information purposes only. Please refer to J.P. Morgan research reports related to his content for more information, including important disclosures.
J.P. Morgan Chase and Company All Rights Reserved. This episode was recorded on the 16th of July, 2026.