EM Fixed Income: Parsing peace talks and payrolls

Hello, and welcome to our At Any Rate Emerging Market 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 Hrystulová, 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 Tanya Escobedo, our LATAM FX Strategist, both at J.P.

Morgan. Tanya, Ben, thanks for joining. Thank you very much, Aneška, for having me here.

Hi, Aneška. Hi, Tanya. We have had an eventful week in terms of Middle East developments.

Over the weekend, we saw U.S. launch Project Freedom successfully escorting a few vessels from the Strait, but then the program was paused to allow room for negotiations. We then had Secretary of State Marco Rubio announce the end of the combat Operation Epic Fury on Tuesday, and yesterday we learned that U.S. and Iran are reportedly inching closer to a short memorandum to end the war. Today we will discuss the market reaction to these announcements and how we are thinking about the risk-reward in various asset classes.

And not to forget, we also have U.S. non-farm payroll scheduled for tomorrow. We will then also dwell on some idiosyncratic stories with Colombia in focus in local markets and Venezuela in credit markets this week. Yeah, thanks, Aneška, for that intro.

Let me kick it back to you. So how are you thinking about the chances that these latest announcements lead to some durable resolution of the conflict? It seems like we've had this back and forth already before.

Is this time different? And from an EM local markets perspective, how are you thinking about what this means at the current levels? You're absolutely right.

It feels this is, if you're counting correctly, take number five in terms of market hopes for a resolution. Now what I am focused on, what it seems to me one of the key issues here for markets and in terms of the negotiation, it is who controls the trade. And my personal take reading all the headlines over this week is that the parties are still not close enough on who will control the trade after the conflict ends.

The memorandum that was leaked to the press was very vague on this issue. We also try and keep up to date with what is the Iranian side view on who should control the trade. And the reporting seems to suggest that despite the memorandum, despite the wording in the memorandum on the Iranian side, there are still many voices that seem to claim that Iran should retain control of the trade.

And my feeling is that this remains an issue that is not easily acceptable to the United States. So when I think about market reactions, we've now had the wave of hope. It would seem to me that as soon as we get to more details that the deal needs to be worked out in specifics, we might again go into another wave of disappointment.

Now it remains very difficult to predict, but let's focus on the market asymmetries. That's where I feel the market price action, regardless of the underlying uncertainty, still gives us a lot of signals. So it seems that on every round of hopes, EMFX trades a little bit stronger.

We reach stronger levels versus dollar on the ways of hope. And we do not sell off as much on the ways of disappointment. And I would very much emphasize that this is lining up with the underlying fundamentals.

We've been discussing this issue on this podcast a few times in the past. But in the past week, a few indicators really caught my attention. So the first one is that EM Forecast Revision Index, the way we monitor our own growth revisions, actually moved higher for EM and lower for DM.

EM manufacturing PMIs that also came out in the last few days were higher than expected. So far, we are not seeing evidence of a cyclical hit to EM. That's one of the key input variables in how I'm thinking about the EMFX risk reward.

Second for me is that the positioning appears to have cleared out some more. Our EMFX risk appetite indicator that we often again mention actually corrected to neutral levels as of Friday. And the final piece of the puzzle for me is that the underlying central bank stances in EM on the margin continue to shift hawkish, whereas we are still benefiting from relatively constrained US real yields.

So when I put these three things together, the asymmetry for EMFX, the way we react to the waves of hopes and waves of disappointment, is more asymmetrically positive, especially for the higher yielding space that also tends to be oil exporters. For the rest of the asset class, the low yielders and rates, I am a little bit more concerned, echoing everything that we said in the past, that this seems to be lining up more as a reflation environment. So yeah, so over the past week, it looks like the speculationary fears decreased, reflationary backdrop increased, and the asymmetries are playing through.

So we've talked a lot about the shock here, and the market is clearly focused on the shock, but we have a cycle which is happening too, and you've kind of mentioned that in terms of the underpinning of the fundamentals we've seen on the EM side. Once upon a time, we in the market were always extremely dialed in to US non-farm payrolls, the labor report, and we do have payrolls to contend with this week amid the Iran news that we're obviously watching. What do you think, Aneska, does this play a big role at this point in terms of the market setup you've described?

Yeah, I think something very interesting has been happening in the past several months, and I am not quite sure it will continue, but let's go through it. What I perceive has happened is that the reactions to US data have been lower for our markets than historically. It seems to me that something has broken in the usual chain of reactions.

We get decent US data, in fact, US Activity Surprise Index has been outperforming within the GM space. But because we are not sure of the Fed reaction function to that, we do not get the very predictable FX reaction to that, or dollar strength when data is strong. So I will be watching this payroll very much in this narrative to see whether...

So my bias is that we probably need to see quite high surprise for that chain of reaction to be active again. If we get only a small surprise, I think the market will again assume that Fed would not be particularly reactive to that, and we might not see much reaction from our markets. On a strong print, I think the bias of the asymmetry of the Fed will be a bit tested.

Let's see how that works out. So far my personal view is that the asymmetry of the Fed will remain a feature, and therefore my own bias is that such potential print would be one to fade. But it is the most interesting thing because I do think that local markets trading patterns right now rely very heavily on the assumption of Fed asymmetry.

Now let's leave local markets a little bit behind and turn to credit markets, and back to you, Ben. How are you yourself thinking about the Middle East developments and risk premia in credit markets? And also just that we discussed Fed and payrolls, is that a concern for credit markets at all at this stage?

Yeah, thanks. I don't think there's a huge – I mean, at the big picture level, there's not a lot of difference in terms of credit markets in terms of, I think, the reaction that you've described for local markets. I mean, I think that there is very sort of fleeting moves in terms of spreads going higher when we have negative news in terms of, I think, the duration and intensity of the shock and what that means for oil prices and then sort of how that translates into the global – ultimately global recession risk.

And there is – you know, anytime we get a little bit of value into spreads and we get some decent news, not to mention what appears more like good news, we see strong rallies. So basically on the back of the latest headlines this week in terms of, again, an attempt to get to a negotiated solution, we have credit spreads back to, you know, making new tights. We were around 240 for the NB Global diversified, I think 241 to be specific, in mid-February, which was the tight of the year and really reaching the tights that we've seen since 2013.

Now we're five basis points below that. So to the degree that we do have, you know, treasuries a bit higher in terms of yields, spreads have just more than compensated for that. So yes, it's an asymmetric reaction function to the – I think it's quite similar to what you've described.

You know, certainly when we think of the NB Global diversified, we think about the sovereigns, you know, there is a majority that are actually oil exporters. So in terms of the terms of trade shock, on net, the asset class from the hard currency side is benefiting here. Yes, of course, there are some which are very – are too close to comfort to the actual ground zero of the conflict, and we have seen spreads move wider in some of the names closer to the GCC.

But overall, I mean, higher oil prices is not sort of – it can be a positive for credit fundamentals in the asset class, and certainly some of those names which are farther removed from the crisis have seen some impressive spread tightening. And we've seen frontiers which sort of have had not a very easy access to markets ever since the last oil shock, the invasion of Ukraine by Russia, where we have really fears of a default cycle on the sovereigns. Now we have a lot of countries which are higher yielding, more risky, traditionally able to tap markets again even in these weeks.

So I think from a market point of view, things feel really still quite supportive, and from a fundamental point of view, some countries are more tested than others, but nothing which is sort of giving us a major concern here in terms of how the market is reacting to the potential for the shock. Now in terms of the cycle, in terms of the Fed and payrolls, yes, I mean, I think this is something that we would be able to have been looking at more closely in the past. It's a little bit more off the radar.

I think it would take multiple prints of sort of job losses and sort of really putting the specter of recession back on the table to shake credit markets, unlike great markets where the Fed coming in and maybe needing to be more hawkish or potentially even at some point tighten can have a real impact in terms of breaks obviously, and there's been fluctuations that you've been discussing with us and also effects. On the hard currency side, I think an economy which is running hotter is putting recession risks farther away, and yeah, treasuries can move higher, but spreads can move tighter, and that's sort of what we've observed when we get a sign that the Fed may have to react to something which is hotter rather than colder. So yeah, and so far as we've seen the cycle look really resilient in the first quarter and even into April and global PMIs, now the job market looks a little bit less worrisome than it did last year.

I think it just kind of moves a little bit farther off the radar for sovereign credit. So let's now shift gears with two idiosyncratic topics to discuss. Let's start with you, Tanya.

Later last week, we had a surprise decision in Colombia by the central bank to hold rates unchanged while the analyst consensus was for a 50 basis points hike. How is the cycle to impact on Colombia's local markets heading into the elections in a few weeks? Thank you, Nezka.

So yes, I think it's important to give a little bit of context. So since the beginning of this year, BNREF has increased rates by 200 basis points to 11.25 percent, mostly in response to the sharp increase in inflation expectations that followed a bulky 23 percent increase in the minimum wage announced by the government back in December 2025. Now, these moves and specifically the high level of rates has created a tension between the board and the government, which is facing higher financing costs and has been pushing for lower rates for a while now.

This tension did reach a critical level in March when the minister of finance abandoned the monetary policy meeting, voicing a strong disagreement with the board's decision to hike 100 basis points. He also put on the table the possibility of not attending to the April's meeting, which would have effectively prevented it from happening, while at the same time the government was saying that if the central bank continued to hike, they would implement another minimum wage hike. So quite a confrontational stance in the past month or so.

Fast forward to the April meeting, as we all know, Mr. Avila did attend and the vote did take place, but the decision was somewhat surprising. First, it was a unanimous decision.

We hadn't had a unanimous decision since April 2025. Two, it was a pause versus market pricing for a hike of between 50 and 75 basis points. And three, this decision came in a context where no real changes in the macroeconomic trends that justified the forward guidance for further hikes had taken place.

And I think that this misalignment was quite evident in the central bank message. Finally, Governor Villar did say that the technical recommendation of the staff was not essential to this decision, and that although the board members did hold diverse views on monetary policy, this decision has been reached to keep agreement in the current situation. So I think that we can draw at least three big conclusions that are very relevant to markets from recent events.

First, I think monetary policy decisions at the moment are politicized in Colombia, which is not a desirable feature for central banks. It tends to undermine credibility, which is a key anchor for confidence in local financial markets everywhere in the world. Second, it places an even bigger burden onto the incoming elections.

The next decision of the central bank will be on June 30th, which is after the second round of the presidential election. And my view is that at current levels of prices in local assets, the baseline is that the new government will reinstate the institutional autonomy and independence of the central bank rather quickly. But the problem with that view is that at the moment we don't have tangible evidence from polls that the opposition has more than 50 percent probabilities of winning this election.

And then third, further decay of credibility on the central bank might continue to push inflation expectations higher. That is usually consistent with steeper yield curves in the country. There's also a risk of rather quick compression of real rates that would weaken one of the key elements that has been behind COP's strength in the past year, which is carry.

And all of this really adds into other concerns that we have had for Colombian assets and the Colombian economy, specifically the rapid deterioration on the fiscal front, valuations for the Colombian pesos that are screening somewhat expensive and aligned with some complacency on the electoral result. And all of this just reiterates our view that there's a space for the currency to underperform versus Latin peers as we move closer to the election on May 31st and June 21st. Thank you, Tania.

And one idiosyncratic question for you, Ben, as well, then we heard this week some news on the process to restructure Venezuelan debt. How are you seeing the developments and what are you focusing on in that issue? Yeah, sure.

So the news you're referring to is we have a new general license from OFAC, which basically allows the government of Venezuela, including its state oil company, PDVSA, to contract advisors, legal, financial, consulting services in connection with a potential debt restructuring. And so therefore, you know, I think as an initial signal towards planning and recognition that the debt restructuring is on the minds of certainly creditors and should be moving forward, key first step and signal. But the general license, it was pretty clear that it is not authorizing a deal actually getting consummated.

And it is also not authorizing direct negotiations between Venezuela and its creditors. So I think it's sort of, you know, putting this certainly on the table and giving a signal, doesn't give us a signal necessarily that this is going to be a fast track or one of the top priorities among many in terms of efforts to recover oil production in Venezuela and generally the Venezuelan economy. I think there's some debate about whether or not, you know, exactly what is defined by direct versus indirect negotiations.

And maybe there's some space here still to advance the ball more than what is there. But at the end of the day, I think that we, of course, look at this at face value. And at face value, it seems like an important signal, an important first step, but not yet something we can see as, you know, suggesting we're going to be here on a fast track.

Right. And that brings us to the end of this JP Morgan At Any Rate Emerging Markets Focus podcast. Thank you 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 7th of May, 2026.