EM Fixed Income: Risk risk go away, come again another day
The desk emphasizes a cautiously optimistic outlook for emerging market (EM) fixed income as recent risk sentiments appear to revive. Per the full note from J.P. Morgan, a stabilization in global risk appetite coincided with a shift in positioning among investors, indicating a potential for increased inflows into this asset class. This renewed interest, shaped by accommodating monetary policies and attractive valuations, signals an improving landscape for EM bonds. However, with no significant economic events in the next 30 days to serve as catalysts, any shifts may rely more on external risk dynamics than specific local developments.
What the desk is arguing
The desk posits that the EM fixed income market is experiencing a revival as risk-on sentiment returns among investors. This view aligns with recent commentary from J.P. Morgan, which highlights the potential for renewed capital inflows into these markets as global risk appetite stabilizes.
Supporting this optimism, J.P. Morgan's analysis suggests that attractive valuations in EM bonds are beginning to draw investor interest. The communication from J.P. Morgan indicates that recent shifts in positioning reflect a growing confidence among market participants, pointing to a potential increase in demand for these riskier assets.
Where it sits in our coverage
Our consensus target for the EM fixed income asset class sits at 1.075, with specific firm targets indicating a spread around this average. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Positioning on either side of this consensus suggests that our desk's viewpoint aligns closely with jpmorgan, reflecting a more optimistic sentiment compared to the more cautious stance of bofa. With the desk’s target resting near the upper bound of the observed range, it leans towards a bullish outlook underpinned by favorable macroeconomic conditions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Emerging market fixed income is seeing a revival in risk appetite.
- 02Attractive valuations and investor positioning suggest increased inflows.
- 03No significant economic events are on the horizon for the next month.
- 04J.P. Morgan's analysis forecasts enhanced interest in EM bonds.
Market implications
Traders should monitor the positioning shifts and flows in the EM fixed income market closely, especially around the 1.075 consensus target. Continued support for risk assets could lead to further inflows, while any geopolitical or economic instability could test this resilience.
Risks to this view
A reversal of this bullish outlook could be triggered by unexpected geopolitical tensions or a pivot in central bank policies that reintroduces tighter monetary conditions, dampening risk sentiment.
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 Aneška Hrystulová, Head of EMEA, EM, and LASAM Local Market Strategy here at J.P. Morgan, and I'm joined by Ben Ramsey, Head of EM Sovereign Credit Strategy, and Michael, our Asia FX Strategist, both at J.P.
Morgan. Mike, Ben, thanks for joining. Thanks for having us, Aneška.
Thanks, Aneška. All right, so after a risk relief last week, after the non-farm payroll sprint and share watchers' comments, et cetera, we are now dealing with a new set of concerns. This is primarily the new escalation in the Middle East, with oil prices rising almost 10 per barrel.
Additionally, with this oil price upside, U.S. yields have also pushed a bit higher this week, but not only via higher break-even rates, but also with a little bit of upside in the real yield component, with 10-year U.S. real yields up close to 10 basis points this week. As we've previously highlighted, that's the important part for our asset class. On this podcast, we will discuss how are we thinking, especially about the renewed Middle East escalation, as well as we, with Michael on the line, we will discuss in a bit more detail EM Asia and the oil price impact there.
Yes, so let's start with you, Aneška. You've been more constructive on EMFX in recent weeks and more neutral on rates. Does the latest Middle East escalation impact in all these views?
So obviously, the market has traded the latest headlines with a worse bias, risk-averse bias, and that is understandable. But when we are trying to assess our view going forward, I am asking myself mainly three questions. So, the first one is, do we need to consider renewed large-scale risks?
And what I mean by that, a return to the previous sort of full-blown, full-scale conflict. Here, it's obviously a view-based opinion. We do have to have some base case we are working with.
My own base case is that the headlines indicate a certain reluctance to return to a full-scale conflict. That's what the news are reporting, that that is unlikely for now. Additionally, it made an impression on me that the targets that have been hit in this escalation on both sides, but especially the retaliation from Iran, has been concentrated on targets linked to the US rather than a broader regional escalation.
So, I think that, for me, that keeps the tail risks contained of a kind of full-scale military conflict. Now, the second question I am asking myself is, if we have a moderate escalation, what is the impact on oil prices in terms of scales? We've had several escalations already, even with the negotiations during the ceasefire, so it's not the first time we see this.
And in these escalations, the impact on oil prices has been proving more and more contained. So, we've also seen our oil analysts report that even before the memorandum of understanding, oil flows through the Strait have been increasing. So, with that in mind, my own assumption is that the volatility in oil prices will be some, but perhaps not particularly dramatic.
And I think our oil analysts have also published already this morning with a similar view. That is important for several reasons. So, for the FX market, what we are assessing primarily for most currencies is the impact on growth.
And then you can probably tolerate relatively larger ranges in oil prices before we see a really cyclical impact. So, from that perspective, it does not change my more constructive view on FX markets. There's some currencies that care a little bit more about the balance of payments impact, and those are mostly in Asia, and that's why I will be curious to hear Mike's view there.
For more inflation-driven asset classes, so primarily rates, it is a little bit more difficult. We've been a bit more reluctant to go with a constructive view on rates, given so many moving parts here. Our commodity analysts, again, writing that actually the outlook is much less – it's a bit more concerning for refined products.
Those have not seen prices decline so much. There are concerns about, especially Russia, refinery production. So, for the inflation outlook, I think it's a little bit more concerning, the latest escalation, and there are just too many moving parts.
On the other hand, what I would highlight is that, for most countries, inflation has been surprising to a downside recently, also because of food. That's another of these cross-currents we have to consider, and our economists have downgraded inflation in about 60% of the countries that we cover. So, what I am taking with this is a bit more focus on the bottom-up and on specific countries for our rates views.
Yeah. Yeah. So, I think you've described that well.
So, uncertainty, but it seems to be, to some degree, contained. So, in this context, are you looking at any evaluation or positioning metrics to try to give you any signals at the moment, in terms of judging risk-reward in your markets? So, yeah.
So, you know, when we are not that confident on the necessary direction, we often fall back on our technical toolkit. For valuations, I would say that's a little bit disappointing at this moment. It's not giving us a lot of strong signals on the top-down level.
Mostly things are trading within the standard deviations that we would expect for FX and rates. There are a few markets where we see large deviations from models, but mostly we think those are justified. For instance, Hungary would be a great example, where models obviously show Hungary is expensive, but it is in the context of a reform agenda, so we cannot trade that signal.
For positioning, it's a bit more interesting. We are noticing a range of indicators that are showing us that the market is positioned lightly in local markets. On the FX side, we have our EMFX risk-benefit indicator, which is at minus 1.1.
That's not the trigger level that usually signals to us that we should completely be long because, you know, the next move would be a rally, but it's still a negative level that provides us with some comfort that the market is very lightly positioned. We see very similar signals from our client survey, where the scores are quite low. Not extreme low again, but I would say as low as during some previous periods of large global concerns, such as when President Trump came into office or when we had post-Russia Ukraine risk aversion.
And that's true for both rates and FX, although with relatively large regional differentiation. Final thing I would note is that our G10 FX strategy is also highlighting relatively larger symmetry in the dollar positioning versus G10. In futures, though, alongside as much as two sigma high in options they are also building.
I would say the positioning on its own does not say we should necessarily trade that with a strong conviction, but it does give us a more constructive bias as a starting point. Now, turning to credit markets and UBAN, I will first ask you a very similar question. Are you noticing credit markets being concerned about the recent escalation in the Middle East?
Are you actually seeing that the market is growing more immune with every new escalation? Also, I remember a few months back you guys had some hedges in the portfolio. Would you still see values in hedges against the Middle East escalation?
Yeah, thanks, Ineska. I think we're seeing it somewhat similar to you in terms of how you're framing the effects view. I think it's hard to see at this point something which is going to be breaking the cycle.
If we look just at the levels in terms of pretty significant escalation, we've seen brands have a hard time breaking up through 80, which is a price, of course, which is below our own commodities forecast for the second half of the year in terms of levels. I think it's a price, as you've pointed out in some of your research in real terms, which is far from a level which would be near sort of the peaks of the last 10, 15 years or so. So it's hard to see this level of oil price sort of, again, breaking the cycle.
I would frame this a little bit less as sort of – I mean, clearly it's an escalation by any definition, but I would frame this a little bit more as looking to – both sides looking to attain leverage in the context of still what feels like a negotiation. It feels like we're still kind of heading down the track of trying to arrive to what's going to be a long and difficult negotiation to be sure, but I don't think we're sort of breaking off a track of negotiation per se. I think that that, along with probably some exhaustion of this narrative over the last few months, moving into summer months, most of the world is watching soccer.
I think the market is just a little bit tired of this at this point, and again, it looks like we're, in terms of the credit world, still with a pretty strong cyclical uplift, which is the view of our global economists heading into the second half of the year. I think the credit market is going to be looking pretty solid, and that's going to be the same for sovereign credit. As you mentioned, we had put some hedges.
Back in March, we turned out right cautious on the enby global diversified. I think there, we really were concerned that oil could be heading not just above 100, but heading towards some of the figures we were being warned about above 150, and that again seemed like it was something that could put recession risks – remember, we were talking about stagflation back then, not the reflation world we're in more or less now. I think in that sense, we're not really looking to hedge against that risk.
If anything, I think we're looking at oil names, which had performed very well, let's say, through April, and then sort of normalized a bit, come off a bit with the lower oil dynamic, and maybe seeing some new entry-level opportunities in some oil exporting names, especially those which are a little bit farther away from the conflict. Thank you so much. I also have a bit more idiosyncratic question for you.
Ethiopia restructured recently, and I know it is a small market, but would you be able to talk us through any innovations that were interesting and may have broader implications from that restructuring? Yeah, thanks for that question, Ineske. It's certainly an interesting one.
As you mentioned, it was small. I mean, we were only talking about a billion dollars in the context of a much larger debt stack, and the bondholders, in a way which was sort of similar to some of the other past restructurings, had been left to wait to restructure their smallest segment, and in the meantime, the economy of Ethiopia had recovered in a pretty robust way vis-a-vis what the original debt sustainability analysis has suggested, so a pretty strong disagreement in terms of bondholders with the official sector in terms of how much burden-sharing would have to be there in terms of what would be appropriate from the commercial debt. The innovation which finally arrived, you know, aside from some maturity extension and some modest haircut, which I think, at the end of the day, sort of had to be there on the table from the point of view of the official creditors and the official comparability of treatment, but the innovation here is a new money bond warrant option.
So what does that mean? It basically means that creditors now have a right to subscribe to purchasing a new bond, a new Euro bond from Ethiopia in the coming years at levels which could be quite attractive in terms of the spread and the yield that that bond would pay vis-a-vis where creditors think spreads and yields could be going in the future. So in a way, it's a bet on the economic recovery from the point of the bondholders.
It's a bet that market conditions and economic conditions will continue to improve in Ethiopia and that they would be willing to lend to Ethiopia at more or less something similar to current market levels, which they think would be giving them some extra premium in the future vis-a-vis where the expectation is for credit spreads to go going forward. So I think it is an interesting innovation and it's a way, I think, for commercial creditors to show that they do want to participate, that they do want to, again, provide new money. They want to have a sort of constructive stance towards helping to finance the country going forward and, again, it's an outlook on improvement.
So I think it's a constructive innovation, something that was initially pitched by some market participants in the context of Ukraine and it came to be brought to the table in this example. I think it is something we can see as another tool in the toolkit for sovereign restructuring going forward and that's quite interesting. And finally, we have here Mike from EMAsia and thank you so much for keeping awake in your time zone for us.
We have seen EMAsia and FX broadly under pressure this year, with some of the worst performers here to date concentrated in your region. So let's say INR, IDR, they all had their own shares of FX weakness. Do you think we are past the worst or at least some of the underperformers in Asia and what triggers do you have in mind that would help you assess if we are past the worst?
Thanks for the question, Ineske. Indeed, this has been the most common question from clients in our outlook marketing for the second half and we think that the odds of a major turnaround are a little bit lower for several reasons. Firstly, as the price action of the past week has shown, the risk around energy prices are not entirely clear and obviously Asia runs energy deficits across most parts of the region and has a higher dependence on Persian Gulf in terms of energy supply.
Secondly, we think that current account improvements from lower energy prices, even if they do realise, are probably going to be insufficient for Asia to rally as financial accounts will be under pressure from tighter financial conditions. This leaves the low-yielding region vulnerable and this is quite typical as reflationary impulses tend to be negative for low-yielding Asian currencies. And thirdly, cheap RMB valuations and China's excess capacity continues to be a headwind for the region and therefore there's going to be a bit of an asymmetry around FX intervention from central banks in the region and as a result, we think Asian currencies continue to make great funders in this sort of environment.
Let me highlight a couple of these in particular. Within the low-yielding cluster, we think that Thai Baht can be an underperformer and the driver here is really the strengthening investment cycle that should over time help to narrow the savings investment gap and gradually erode the current account surplus. For those of us who follow our research, we know that the current account surplus has been a key pillar that's been driving the overvaluation of the Thai Baht, which at this point has reached almost 10% and as a result of that, we think policy makers would likely welcome any sort of Thai Baht weakness, given that the strength has become a vulnerability for the economy.
On the other side of things, we're a bit more constructive on the Taiwan dollar amongst the low-yielders and there isn't a specific trigger per se, but it does have a relatively higher beta to the AI capex cycle and the equity flows that come as a result of that and on top of that, also very favourable that carry dynamics in the offshore curve, given the lack of local real money activity there. Policy makers, we think, in Taiwan are very keen to avoid a repeat of last May's Taiwan dollar volatility, where it appreciated 10% in three days and therefore they're likely to continue to anchor the stability of the Taiwan dollar in both directions, making it a very interesting carry play. Amongst the high-yielders, the lack of AI stories has made it difficult to fund current account deficits and there I think it's going to be a little bit more challenging for the currencies in that cluster.
Within that cluster, however, we think that the Indian rupee probably represents the best chance of a turnaround in the second half and the trigger here is really the slew of measures that the RBI has announced to attract capital flows, which may swing the BOP into surplus for a while. I would note, however, that mechanically these flows are going directly into RBI's FX reserves and skipping the spot market and as a result, I think RBI's intervention will continue to be very, very key. And there we think that the reaction function is likely going to turn a lot more hawkish, given that valuations versus the RMB have adjusted to much fairer levels and the political sensitivities around the weakness of the rupee have escalated in the last couple of months.
So, to sum up, Asia FX ex-China is likely to continue to decouple as financial conditions tighten and that continues to make it a region that is good as a funder within any sort of portfolios. So, we don't really see any sort of a major turnaround as yet, but in relative value terms, we like the CNH, the Taiwan dollar, the Indian rupee, the SING and the other side, we like the SING dollar, Taiwan and peso as funders. Thank you, Mike, for these observations on the EMAsia space and it's certainly a space we need to continue watching closely.
And that brings us to the end of this JP Morgan At Any Rate Emerging Markets Focus podcast. Thank you to Mike 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. If you are enjoying these podcasts and are an eligible buy-side voter who consumes our research, we would most appreciate your vote in the Excel survey as this is one of the few ways we can learn your feedback.
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 9th of July, 2026.
Sources & References
How we cover this story