EM Fixed Income: Still waiting for the conflict to pass over
The desk maintains a cautious stance on emerging market (EM) fixed income, emphasizing the need for patience as geopolitical tensions persist. Per the full note from J.P. Morgan, the ongoing conflict involving the U.S., Israel, and Iran remains a dominant factor, with a base case of a four to six-week timeline for resolution. Recent developments suggest that while military actions are ongoing, the market is beginning to shift its focus from inflationary pressures to potential growth concerns, particularly as oil prices rise. This dynamic is reflected in the mixed price action across EM rates, with short-term yields declining while longer-term yields show volatility.
What the desk is arguing
The desk frames this as a period of heightened uncertainty in EM fixed income, driven by geopolitical events that are influencing market sentiment and pricing. J.P. Morgan's analysis indicates that the conflict has led to a reassessment of growth versus inflation risks, particularly as oil prices rise and central banks may need to adjust their policies accordingly.
Supporting this view, the commentary notes that EM one-year and two-year yields have recently decreased, suggesting a market reaction to potential growth slowdowns. This aligns with J.P. Morgan's cautious positioning in local markets and a more negative outlook on EM credit due to tight spreads.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1750, with a range of 1.1300 to 1.2000. Notably, jpmorgan has a target of 1.1800 for March 2026, while goldman projects a higher target of 1.2500 for the same period.
This view aligns with the broader consensus, as the desk's target sits within the middle of the range, indicating a balanced outlook amidst the prevailing uncertainties in the EM landscape.
How other firms see it
Several firms, including ubs and hsbc, share a similar outlook, projecting targets around 1.2000 for March 2026. Conversely, firms like citi hold a more bearish stance, targeting 1.1300 for the same period.
The trajectory of EUR/USD is closely linked to the actions of central banks, particularly the ECB's response to inflation and growth dynamics, which could further influence market sentiment and positioning in the coming weeks.
Key takeaways
01Geopolitical tensions are the primary driver of current EM fixed income market dynamics.
02The market is shifting focus from inflation to growth concerns, particularly with rising oil prices.
03Patience is advised as the situation evolves, with potential scenarios ranging from abrupt resolution to prolonged conflict.
04Mixed price action in EM rates reflects uncertainty and the need for careful positioning.
Market implications
Traders should watch for movements in oil prices and their impact on EM yields, particularly in the short end of the curve. A key level to monitor is the EUR/USD consensus target of 1.1750, which may be influenced by upcoming geopolitical developments.
Risks to this view
Geopolitical escalation could lead to further sell-offs in EM fixed income. Conversely, a rapid resolution could trigger a squeeze higher.
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 Jonny 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 Ben Ramsey, Head of EM Sovereign Credit Strategy, both at J.P.Morgan. Hi, Aneshka, Ben.
Thanks for joining again. Hi, Jonny. Nice to be here.
Hey, guys. How are you? So we're just over a month now into the conflict between the U.S., Israel, and Iran remains really the key driver for our market.
So we're getting into the time frame, which we had talked about at the beginning. So it's probably a good opportunity to update on where we think we are in this conflict and how the different parts of the emerging markets are doing. Yeah, Jonny.
So let's talk about time frames here. We are sort of into that four to six window that we initially thought about as a base case. Do we need to change that base case?
And what do we think here is the right stance as markets are kind of getting exhausted of chasing headlines, but we do need to kind of figure out where this is going? Yeah, so as we've talked about before on this, we've had a base case of around a four to six week conflict, which has been outlined from early on by military figures at the start. And I think that's been relatively consistent throughout.
We are now obviously beyond week four. So need to think about really how close to the end of that time frame we are. I think also at the same time as having a base case, we have tried to highlight that we need to know that we are talking about a war.
And so the assumptions really on how strongly we can have those assumptions need some humility. We need to temper the strength of conviction. And so that's why we've been keeping really quite light in our views in local markets close to home in effects and rates, really since week one of this, a more negative view in EM credit given spreads were so tight where we saw some of the asymmetry.
But caveats notwithstanding, I think we also have right now it feels a lot of fog in the news flow. I think that's probably a tactic from both sides. But some of the more fact based developments seem in line with that four to six week scenario.
So President Trump on Sunday talked about having hit around 13,000 targets with 3000 to go. So that would sort of put you in that time frame. There was an article actually from quoting the Israeli Air Force today, which said that they were close to having completed targeting of all the critical assets of Iran's military production industries.
So those seem to be fit. We add up the targets which have been hit, you're sort of talking north of 22,000 now in Iran. So that process that we have had outlined of the military sort of systematically going through that target list feels within that time frame.
But the question is what then comes next? And we'd outlined in publications really three major scenarios that we were thinking about. One was what we called an abrupt end to this, some kind of semi-unilateral decision by the US and Israel to halt strikes without really anything formal which happens next.
The second is a scenario which there is some measure of success and some sense of having some form of agreement to end this potentially with Iran. And then finally, I think obviously there is a scenario where this escalates and goes for longer. And I think that maps into some tail risk for the global economy and growth and inflation, which I think the market is well aware of.
I think the first two scenarios have looked more likely to us, sort of avoiding that tail risk. That's why we've had that bias to want to add back. But I think we're happy to be patient.
Also with that, there have been numerous to-ing and fro-ing in terms of the headlines. So we may miss the first move, but I think we'd like to have a little bit more certainty about that. That's where I think we are at the moment.
So let's maybe talk first local markets and then credit. And Aneshka, let's start with local markets and really start with rates, where we've probably seen the bigger moves, to be honest. The start of this conflict saw rates initially move up.
There was a lot of concerns focused more on the high inflation rather than the weaker growth aspects of this. So markets, pricing, central banks would need to hike. But interestingly, in the last week or so, as oil has started rising further, again, we've seen certainly developed market rates started moving lower in the front end.
Concerns shifting, it seems, to central banks, which might need to cut on the risk of lower growth. So sort of shifting from inflation to growth is the main concern. So for EM, how do you see that tension in our rates markets between inflation and growth?
Are we getting to the point for EM as well that if oil goes up further, we're going to have growth concerns and rates should come down, certainly in the lower yielders that we have. And if things de-escalate, then rates should come down as the inflation concerns come out. So how are you looking at that?
So let's first start a little bit with the background. As you mentioned, the price action for the EM rates, we are observing something similar for our rates markets. So some of the most volatile moves up have now come down.
We had, on average, most EM one-year and two-year yields move a little bit lower over the past few days. On the other hand, in the long end, let's say 10-year yields, there's been a little bit more mixed price action with quite few yields moving actually higher. In the five-year sector, we also had some markets move higher where you are kind of shifting the pricing for inflation risks more into the medium term.
Now with that in mind, what has happened is essentially one-year, two-year has flattened a bit, whereas two-year, 10-year has deepened. Now I would link it back to the analysis we published last week. For me, the most interesting part of the factor where we highlighted that the price action has been most contradictory compared to the previous examples of supply shocks has been the one-year trade where we saw steepening at a rate that completely looked different to the previous episodes.
And that's where it's starting to flatten. When I think about the scenarios you outlined, I think this is probably the part of the curve where we can see that dynamic layout most clearly. I think it would go worse if we have growth concerns come to the fore and let's say exchange rate markets, FX markets become weaker.
I think central banks would be forced to react to that to some extent, but it's still a scenario where one-year trade can come lower. On the other hand, if we see a calming down of the entire situation, I would also see that as one scenario where one-year trade rates can come lower. So, I think that's maybe the part of the curve where you can see the dynamic you outlined most clearly.
At the same time, I would still kind of caution that outright fading some of the pricing of hikes really relies on a good understanding of the underlying situation we are going to get because we are still only learning about the inflationary impact that we are going to see. In a few countries, we've seen now reports of March inflation, which has gone up quite sharply and we are yet to see the pull through from several channels, fertilizers, food prices, plastics, products. So, I would say that there's still quite a bit of uncertainty on the actual need to hike, but I do think in curve trades, we can start to see the dynamic you outlined.
Got it. Thank you for that. Ben, let's bring you in here and obviously, we've spent quite a lot of time on this podcast talking about the lack of movement in EM credit spreads since this conflict broke out in the Middle East just over a month ago.
Actually, the last week has started to see some spread widening build. We are now 30 basis points wider over the last month, it's something, and that puts us about 50 basis points from the year's tights in terms of EM sovereign credit, slightly less, but same idea for EM corporates as well. Do you think that is the market finally getting more concerned about growth and the real implications of it?
Do you think this is just a feature of the way US Treasuries have moved and not much else? How are you looking at it and is it getting us enough to sort of get a bit less negative on EM credit? Yeah, Johnny, as you said, we started to see some movement here.
I do think that we do have to sort of look at the Treasuries and try to see what that's telling us about growth risks. And I think certainly over the last week, we're starting to see a little bit more of that. I mean, if we just looked at sort of the first, say, three weeks of the conflict, most of that spread, so as we mentioned, the spread was pretty narrow, but yields were up like 50 basis points.
So we were basically just following Treasuries higher, like sort of 80% of where our spread was, was just a function of where Treasuries were going. You know, over the last few days, we're now sort of 50-50, meaning we've seen Treasuries actually rally about 15 basis points in the last two sessions. I think that is starting to incorporate some growth risks globally.
And we've had yields not really sell off that much, but are moving a little bit wider. So that's our spread widening of the last week. And that is, you know, that's credit risk premium, and it looks like some growth concerns.
You know, we're still at a level which is quite rich historically, we're still under 300 basis points for the NB Global Diversified. We've basically, since the GFC, only been under 300 basis points like 18% of the time, if we look at the months and count them all up. So you know, we're getting back to a level where we haven't been since last October, you know, giving away a lot of that sort of record spread tightening we've seen in the last half year.
I think we're starting to get the levels that will be more interesting, but I think it does depend really on this view that the global economy and maybe the US economy will bend but not break on the back of this shock. Great. Thanks, Ben.
So Aneshka, back to you. Let's talk about EMFX and currencies have actually continued weakening against the dollar in the last week. It's been fairly orderly.
And actually, maybe today we're bouncing back a bit stronger here for EM currencies. But do you think that they are offering entry points here? Is it a bit too binary in EMFX given the scenarios that we still don't know with a lot of certainty?
And maybe partly related to that, do you think investors, which look like they came into this pretty well invested in EM currencies, do you think they've largely de-risked as we've been through this and the market's cleaner here? So for EMFX, obviously it's an asset class that in the first place will respond to the risk appetite to the developments on the ground. But let's focus just on the asymmetry, as you've mentioned.
If I were to think about EMFX entry points, if I have an asymmetric starting point where I could take a little bit more of the underlying uncertainty on the scenarios in the Middle East, I would boil it down to roughly three factors. The first one is, have investors indeed de-risked? And here, if you look at our EMFX risk appetite index, our favorite indicator, we mention it very frequently, well, it has turned negative, but it has not moved to extreme negative levels.
We are quite a bit off that. And to me, that actually really resonates with the client feedback we've had. I hardly meet investors that have gone outright short the asset class.
And so if people have actually put outright shorts, that's probably the environment where we would see the EMFX risk appetite go extreme negative. On the real money side, we tend to mostly rely on our EM client survey, which has shown some decreased FX positioning, but not an aggressive de-risking. That survey we obviously get only once a month.
So that's one factor, have we de-risked enough? Second one is, have valuations improved substantially? If you start screen extremely cheap in several currencies, that would also give us potentially an asymmetric starting point.
I would say across the space, our models do not show any extreme risk premia. In fact, most of the currencies I monitor are very close to fair value. Some of them started before the war rich to fundamentals, modestly rich to fundamentals.
Now they're about fair. A few I can see slightly cheap, but no extreme risk premia across pretty much any currency that I can see. The final point is, if we were to start getting some central bank action, that can also provide asymmetry.
So for instance, central bank, hiking rates and defense, or doing any other instruments. And on the margin, we see a few central banks here and there do very marginal steps. But I would say, by and large, we have not seen any defensive action.
To be fair, the FX weakness hasn't been that dramatic to force that. But certainly, just simply thinking about the asset class and entry points, I do not think we have that asymmetric entry point in general. So then it comes really back down to the underlying scenarios on the ground.
And here, we can be geopolitical experts, but the uncertainty, I think, still remains fairly substantial. Got it. Thank you, Aneshka.
Ben, let's finish with you. And there has been some desire, sort of in an analytical terms, to think about this current energy shock versus 2022 following Russia's invasion of Ukraine. That, when we look at our markets, drove credit spreads a lot wider in 2022.
It was a period that we had multiple sovereign defaults. Do you think that's a good comparison? Is that what you should be thinking about here, or are they pretty significant differences?
You think that's not such a great way of thinking about things? Yeah, I think there's some pretty significant differences. I think we need to start with the idea that back then, we were finishing up basically over a decade of zero interest rate policy.
And we had very low treasury yields. We had negative real rates in the U.S. And the Fed was just needing to embark, given the inflationary pressure, not just from the oil shock of the invasion of Ukraine, but that was adding fuel to the fire of basically the supply and demand disruptions which were causing inflationary pressures through the exit of the COVID pandemic.
So this very abrupt and disruptive adjustment of the breadcore rates environment, I think, was a fundamentally different sort of backdrop to what we're facing right now when we're coming into this, yes, with inflation running a little bit odd, but we have treasuries well above 4% for quite some time. We have U.S. real rates which have sort of reestablished themselves in significantly positive territory. And at the time on the back of this environment, we were in a very different technical position for EM.
So we had been seeing years of inflows, important inflows. We've been seeing lots of issuance, including from very low-rated creditors. So there hadn't been buffers built in terms of the fundamental side.
So I just think basically there was a lot more countries exposed to a much more multifaceted shock if we consider this adjustment that had to happen in rates and poor markets. Now I think we've seen EM sovereigns quite stress-tested by this pandemic, this episode. They've come out through the fire.
We guessed with some defaults, but we avoided any massive cycle of defaults, and we've seen basically EM economies build buffers. I think the other thing to look at, which has been discussed, is just the overall absolute level of oil prices. So oil prices were higher to go into the 2022 episode, spiked much higher, and were higher in real terms.
We've obviously had a considerable amount of inflation through that cycle and up until now. So yes, we've had a very significant change in terms of the level of the oil price, but from a lower nominal level and a lower real level. So I think that that also is giving a little bit of room to absorb this shock in terms of what we discussed before, how this can impact the global economy and recession risks.
That makes sense. Thank you, Ben. And that brings us to the end of this J.P.
Morgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Anoushka and Ben, for joining today, and thank you all for listening. We wish everyone celebrating a happy Easter, happy Passover, 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 rights reserved. This episode was recorded on 31st March 2026.