EM Fixed Income: Navigating some sudden market turbulence
Lead — The desk anticipates that recent turbulence in emerging market fixed income will lead to cautious positioning among institutional investors. Per the full note , the authors highlight a notable uptick in volatility, largely driven by external factors such as shifting global monetary policy and geopolitical tensions. Amidst these dynamics, market participants are monitoring credit spreads and liquidity levels closely, indicating a more cautious stance overall. As liquidity pressures mount, expect to see how central banks' responses to inflation impact fixed income investment decisions in emerging markets.
What the desk is arguing
The desk is forecasting a cautious outlook for the EM fixed income landscape, following recent volatility. As discussed by Christovova, Ramsey, and Hong, significant external pressures are reshaping investor sentiment, with attention to inflationary pressures pressing central banks globally.
The commentary indicates that a critical driver has been the increased volatility observed in the market, directly correlating with recent economic data points suggesting higher inflation rates. This heightened volatility signals that investors may need to reevaluate risk exposure within their portfolios, particularly in vulnerable assets.
Where it sits in our coverage
Our consensus target for EM fixed income currently sits at 1.075, with specific forecasts including: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's positioning aligns closely with jpmorgan, reflecting a slightly more optimistic perspective within the broader cross-firm consensus. There is a notable divergence, however, with bofa adopting a more conservative stance, suggesting potential downside risks that demand caution before leaning into positions.
How other firms see it
The general sentiment among aligned firms indicates a cautious but mildly optimistic view on EM fixed income, notably from jpmorgan, while bofa holds a bearish perspective, advocating for a defensive allocation.
This discourse intersects with the USD/TRY movements, particularly as geopolitical factors influence currency volatility, necessitating close monitoring of related foreign exchange trends in emerging markets.
What the calendar says
No high-impact calendar events are scheduled in the near term that would create immediate pressure on EM fixed income markets. However, upcoming central bank meetings globally remain critical to watch in terms of potential policy shifts that could influence investor sentiment.
01Recent market turbulence is spawning a more cautious approach among institutional investors in EM fixed income.
02Increased volatility, driven by external factors, is prompting a reevaluation of risk exposure.
03The consensus target for EM fixed income is 1.075, with divergence between firms indicating differing outlooks on risk.
04USD/TRY movements will be essential to monitor as geopolitical factors continue to create market uncertainties.
Market implications
Traders should pay close attention to credit spreads and liquidity signals in the EM fixed income space. The upcoming central bank responses to inflation readings could serve as pivotal catalysts for market direction.
Risks to this view
A primary risk to this cautious view is an unexpected turnaround in global inflation data or a surprise policy pivot from major central banks, which could significantly alter risk perceptions and investment flows into EM fixed income.
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 am Aneška Hrystulová, Head of EMEA, EM, and LASAM Local Market Strategy here at J.P. Morgan.
And I am joined by Ben Ramsey, Head of EM Sovereign Credit Strategy, and Y.M. Hong, Head of EM Corporate Credit Strategy, both at J.P. Morgan.
Y.M., thanks for joining. Hi, Aneška. Thanks.
Nice to be here. Thanks. Pleasure on my side.
It has been a rather difficult week in markets, particularly for EM Local Markets. When we look at our price action, certainly our benchmark, GBI EM Local Markets Index, has taken a hit. We've reached peak performance towards the end of August.
And then we are down about two point, over two percent. We're still up on the year, but we've given back more than half of the performance that we had up to end of August. Certainly EMFX has now contributed to that.
Before that, EMFX was the more resilient part of the asset class. But since end of August, it has also started to show some wobbles. One thing I would highlight to start us off in the discussion today, if we look at the month performance year to date, and I'll zoom in on the very recent performance in a second.
If you look month to date, EM has been a byproduct of the external pressures. So in EMFX, certainly we have suffered some downsides, but actually most currencies month to date managed to outperform the euro. Similarly, in rates, when we look at month to date performance, rates markets have been selling off, but the sell-off was led by U.S. yields across different pennies.
That changed late this week when we look at a price action in a very, very narrow window starting yesterday. EMFX underperformed the euro and some of the rates market sellers were larger than in the U.S. So we saw a little bit more vulnerability come through in the last few days.
So yes, so with that, it has indeed been a difficult week, particularly for local markets. Yeah, so let's pick up on that, Ineska, in light of this price action, where do you think these pressures are coming from? It seems this week the potential U.S. diesel export ban has become a key driver for markets.
Would you agree? And how significant is that risk for your markets? Right.
So some of these pressures that markets are reflecting have been in play for some time. We have been talking here of a reflationary backdrop, so strong growth, strong inflation, which in general has been a key driver of some of the rates sell-offs. What we have seen come through a bit more this week has been a little bit more signals in the data of U.S. strength compared to the rest of the world.
Certainly some of the data have suggested that. So that is always a little bit more difficult point for emerging markets when you have to compete with the U.S. performance in growth specifically. And then the diesel ban certainly has created an additional source of risk premia.
I would say this has played a large role in the recent price action. I would say that without that we would have not nearly performed as poorly as we did. Now why does it matter?
So we have for a long time looked at oil prices and said, look, oil prices are high, but in real terms they are not a constraint on growth. They add to inflation, but they are not very large in real terms to really endanger the growth outlook. Now for product prices, the price action has been a lot more problematic.
In real terms, product prices show a lot more pressures than outright crude. And the diesel ban is important because several of EM countries rely on U.S. imports. Now our commodity analysts have published, and I would refer our listeners to look into their publications in more detail, but certainly some of the statistics show which EM markets are a little bit more vulnerable than others.
So we know that some countries, particularly in Guam, are a bit more reliant on U.S. imports of diesel in their total consumption. So for instance, in the statistics, Chile and Peru look to have a larger reliance. I would also move a little bit away from the direct effect of who imports necessarily from the U.S., but rather who is vulnerable in general, because if there is restrictions on U.S. exports, it would affect the broad product market.
It wouldn't be just for the countries that import from the United States. So here we certainly see some differentiation across the space, and I think some of those vulnerabilities have played out this week. So when we look at countries that import more refined products than their overall energy imports, the countries that stand out in the statistics with larger shares are Chile, South Africa, Philippines, Mexico.
And I think we've seen some of that play out into this week's price action. So never a dull moment. Clearly there is a lot of uncertainty right now.
How would you frame this in terms of the situation evolving from here? We've been mostly neutral on rates and constructive on FX. Do you think this allocation still is what makes sense for local markets?
So as I mentioned, reflationary backdrop has been our base case, and reflationary backdrop usually lays out as negative rates or yields higher, and quite okay for FX, particularly for carry plays, particularly for carry plays. And that has driven our allocations this year. Having said that, it does seem to us that markets have come to a point where a lot of these drivers are priced to perfection, and the macro environment feels a lot more uncertain to us.
For instance, GBI year yields have sold off more than one standard deviation of what they usually sell off, and that gets you to a place where you have to consider that the uncertainty is rising. Similarly, on EMFX, in some of our models late last week, it was showing as EMFX performing at the one standard deviation mark too strong compared to some other drivers. So when we think about the global backdrop, it does feel a bit more uncertain to us.
Where do we necessarily shift? So I think for EM, we have to consider if the external pressures start to increase probability of more stagflationary backdrop. So that would be if pressures on capital flows or pressures from core yields start to impact on EM growth outlook or EM capital flow outlook.
So that would be the type of price action. On the other hand, considering energy prices, product prices, that play such an outsized role, we also have to consider if the risk premia in those markets are sufficient. And if those risk premia come off, we could swing in a more positive direction.
So indeed, it does feel to us like the environment is a bit more uncertain at this moment. And we have been writing about that. Now, moving over to you, Ben, I've talked at length about the pressures in local markets and our price action.
Can you describe for us what has the price action been in credit markets? Have your markets had as difficult week as us and have any countries or specific stories put out for you? It's been a tough week to be sure.
If you look at the MB Global diversified in terms of returns, similar to what you've said, we've given back about half of the returns that we had earned through the middle part of the year and had been sustaining up until through August. But we started to give those returns back really leading up to the Fed. I mean, it really was that sort of sharp move that we saw in treasuries before the Fed.
Of course, we have on the MB, as we've been mentioning on this podcast, very tight spreads. Spreads have kind of held in. It's really been a function of treasury returns, which have been negative.
I think it felt pretty orderly up into the Fed. The Fed, when it hiked, and as we talked about last week, we actually started to get a bit of a constructive tone in the aftermath of that. But yeah, really since the second half of yesterday's session, things started to move and feel a little bit more ugly.
I wouldn't call it disorderly, but a little less comfortable, I think, in terms of price action than what we've been seeing maybe through the course of the summer. MB is a longer duration product, and I think YM will probably talk about a little bit of a contrast with corporates a bit later on. So we are a bit more susceptible here when we get these moves.
What we've seen in terms of credits, which have underperformed, it's a bit of a mixed bag. I mean, we can sit here and say that finally we're seeing some weakness in the lower rated bucket, and we have been sort of thinking about spread compression, and we've been favoring high yield over investment grade. But I think it's a mixed bag.
We're seeing certainly the performance, which has come under the most stress, has been names like Argentina, names like Ukraine, names like Venezuela. So certainly those fit in the more high yielding, more distressed bucket, but a bit more for idiosyncratic reasons, and also credits where positioning has been quite heavy. There's other high yielding names that have been recently in distress over the last few years, which have actually been outperformers.
So in Asia, we've seen Pakistan perform pretty well, at least up until today. We've seen Sri Lanka perform pretty well. And those are oil importers.
So I can't say that we are completely here thematic, and we have seen some investment grade names underperform, particularly longer duration. We've seen Chile as another performer, Mexico as well, but I think Mexico, we have to sort of look at Pemex in that complex, which it kind of gets thrown into the high yield bucket and is one where positioning is a bit heavy. So yeah, overall, I'd say it's been, like I said, a little bit less comfortable in the last session or two.
I think certainly what we discussed last week when it seemed like maybe we would have the Fed put a ceiling on the long end of the Treasury curve and then we could get back into a grind tighter mode, you know, the very sort of abrupt move higher in Treasuries since yesterday's session, I think has sort of upended that thesis right now and gotten us back into a world where we're a bit more uncertain about what is going to put the brakes on the upward move in core rates, as you mentioned, in terms of the dollar strength. And in that world, we do at some point get worried about what could be the all-in financing costs for sovereigns when they have to sort of come back to market to refinance. I think at this point, we're still with spreads tight enough where we're not really worried about refinancing risk for our asset class, and as we've been talking about on this podcast, better fundamentals are there, bigger buffers are there.
But yeah, this feels like a shake-up, maybe some cleansing and positioning, and I think we do have to sort of – the market here is searching here for what the next catalyst is or what may be sort of can arrest this upward movement in terms of core markets rates and stronger dollar. So let me now turn to you, Ayaan, and bring you into the conversation. Corporate credit has traded okay up to now, but can you identify here pockets of vulnerability that have been visible in recent days, and sort of how would you characterize maybe any differences with the sovereign discussion I've just put on the table?
Thanks, Ben. So in terms of corporates, as you said, SEMB does have shorter duration, so it tends to outperform at least in total return terms when there's a rise in rates. So that's also happened.
But the interesting part is even in terms of spread performance, SEMB has been more resilient. In fact, if you look at the SEMB spread, we are at 151 basis points for SEMB BD, and that is actually the highest level since mid-2007. So at least in terms of spread terms, SEMB has been absorbing the rise in rates pretty well so far.
And also if you look at the total returns, we are about half a percentage points better than I think EMB as well as compared to U.S. high rate and high yield, respectively, over the past month. Also in terms of the regional and sectoral performances, it's actually been relatively even. Some of the standouts include on a sector level, transport sector, and that's been hit by the higher oil prices, especially the airlines, so that's not a lot of surprise.
But the oil and gas sector hasn't actually outperformed necessarily, so it's really this one relatively small transport sector which has lagged. But given that a lot of the issues there have already restructured, and there's a lot of But given that a lot of the issues there have already restructured, we don't expect that sector necessarily to have additional negative credit consequences. More broadly, higher rates could be negative for corporates in the longer run, but we are starting from a very strong starting point in terms of fundamentals, and I think that's been providing people with more confidence in terms of resilience.
I think the one country which has suffered more from higher rates locally, especially is Brazil. We've had the main contributors to our year-to-date defaults coming from that country from a couple of large issuers, so that remains a country to look out for. But at least over the past month, simply Brazil hasn't necessarily underperformed the overall market.
So, if I were to summarize, it does look like corporate credit relatively resilient, and in general, credit handling the external pressures a bit better than our liquid EM local markets. Separately, I would also mention that frontiers, local frontiers, have also been trading relatively resilient. In general, frontiers have been a space where we know investors are well-positioned and have been able to generate carry returns.
Perhaps another signal, that was our JP Morgan Credit and Frontier Conference here in London last week, which had the highest attendance on record. Now, I know you traveled here to London for the conference. You also met a lot of investors on the sidelines.
Would you be able to summarize for us the most interesting takeaways, both for credit and for frontiers? Sure, Nershka. There was an interesting divergence in terms of views, specifically, there's widespread comfort on the stable fundamentals and supportive technicals on both sovereign corporates as well as for the broader EM.
However, on the very macro themes, there seems to be much less conviction, especially the overwhelming drivers, such as rates, geopolitics, and also the AI-led investments and growth. So, as a result, though, there's still expectation that markets EM would be relatively resilient, and investors seem to be content to stay in widespread products, notwithstanding that widespread products, notwithstanding the tight spread levels. Also, asset allocators and crossover accounts continue to be involved, given the steady performance and diversification from the EM.
Some of the specific countries which came up quite frequently are Brazil, Turkey, Central Asia, and Dubai Real Estate in the corporate space, and also in terms of sectors, oil and airline sectors were discussed, given the oil price volatility. One interesting theme was repercussions from the US AI and hyperscaler elevated issuance on EM credit. At least for now, investors seem to think that the impact would be fairly contained, but there was still some unease over the continuous supply from this particular segment over the coming years, since that is expected to be quite elevated.
Sort of related to that, I mean, there was also some focus on the potential issuance from Asia data centers, which may provide an opportunity to pick up credits with reasonable spread and risk reward from Asia. But generally speaking, I mean, there's definitely a bias still towards adding high yielding assets, especially for carry, including frontier. And on that front, we had about 20 sovereigns at this conference, and the majority were from the frontier countries, and that does reflect the high interest in the sector.
Investors mentioned that a major supporting factor has been stability and USD, unlike some past episodes when a stronger US dollar posed challenges to EM. So there was focus on fund and carry, given that currencies have already rallied and rates come down. But obviously, the currency trajectory remains an important factor to look out for.
So very, very interesting, and certainly the conference had a lot of interesting sessions. Now, that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast.
Thanks to you, YM 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 J.P. Morgan research reports related to its content for more information, including important disclosures. 2026 J.P. Morgan Chase & Company All Rights Reserved.
This episode was recorded on the 24th of September, 2026.