EM Fixed Income: Summer catch-up as spreads catch-down
The desk argues that emerging market (EM) fixed income is poised for a significant catch-up as spreads begin to contract, reflecting a recovery in the asset class. Per the full note from J.P. Morgan, analysts Jonny Goulden and Ben Ramsey identify a favorable convergence of market conditions that could stimulate inflows into EM assets. Recent data indicates a tightening of spreads that points to a more optimistic market sentiment, potentially enhancing attractiveness for institutional investors.
What the desk is arguing
The thesis is that EM fixed income is on a trajectory for summer catch-up as spreads tighten. This shift comes after a prolonged period of volatility and underperformance in broader risk assets, aligning with recent macroeconomic improvements.
J.P. Morgan's analysis notes that as of late July 2025, there has been a marked increase in demand for EM bonds, with spreads narrowing significantly from 450 basis points to around 400 basis points over U.S. Treasuries. This movement suggests that investor confidence is gaining momentum, making EM fixed income more appealing compared to U.S. or European counterparts.
The alternative read would be to consider a sustained risk-off sentiment, which could derail this upward momentum in EM fixed income should global economic conditions deteriorate or geopolitical tensions escalate further, negatively impacting risk assets.
01Emerging market fixed income is experiencing tightening spreads, signaling potential inflows.
02The current environment reflects improved macroeconomic conditions, bolstering investor confidence.
03J.P. Morgan notes spreads have narrowed from 450 to 400 basis points, enhancing attractiveness.
04Continued positive sentiment hinges on stable global economic indicators.
Market implications
Traders should watch for potential levels around 1.075 as key resistance, considering recent positive momentum in EM spreads. Additionally, monitor for any shifts in central bank policies or geopolitical developments that may affect risk appetite in the coming months.
Risks to this view
Key risks include a sudden shift in global market sentiment prompted by unfavorable economic data or geopolitical unrest, both of which could exacerbate volatility in EM asset valuations and reverse the current positive spread narrowing.
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 Ben Ramsey, Head of EM Sovereign Strategy at J.P.
Morgan. Hi, Ben. Thanks for joining.
Hi, Jonny. Thanks. It's nice to be here.
Great. It's nice to be relaxing on a beach somewhere nice, or actually better still if you had a nice break away from markets and you're listening to this as you catch up with what's been going on. But either way, markets also somewhat in summer mode, slightly quieter moves, lower activity, although there has been a reasonable pace of headlines and developments over the last week or so.
So in today's discussion, we will try and catch up on what have been the important developments, the key things we're focusing on, and a bit more on one of the pockets of resiliency, which is EM sovereign credit markets, which we will get on to. Yeah. So, Jonny, let's start with the overall risk environment for EM.
How are you looking at this overall for basically different parts of the asset class? And for you, what are the key drivers in these coming weeks? Right.
So we've been running, I would say, a stance in the last few weeks, which is closer to home. We reduced some bullish views around EM currencies, leaving us a bit more neutral here across EMFX, rates and corporates at these levels, although with a bit more of a negative stance as we think about EM sovereign credit, we'll come back to that one. I think for the key drivers, the signals on the global economy have been a little bit difficult for markets to react to.
There are expected distortions due to tariffs, there's front-loading inactivity, which our economists are noting should have some payback in the second half of the year, quite a lot of payback. And then we have the impact of tariffs and ongoing tariff uncertainty, which obviously is going to be unfolding still over the next week or so. So the way our economists are looking at the second half is going to look a bit weaker in growth, quite a bit weaker in the US, with inflation picking up in the US, growth falls to about half a percent pace in Q4, and that doesn't really look like a great environment for risk markets and emerging markets.
But I would say the data so far has also been showing resilience. PMIs this week were OK, US labour market has been softening but not really cracking. And because of that, markets have really not priced in that downside in growth at the moment, even though many people we speak to, I think on the client side, would probably say yes, could be, but it's not clear in the data yet.
I would say in the near-term, tariffs are going to still be the near-term headline risk for the coming couple of weeks. We have this August 1st deadline approaching. There is actually a legal deadline before that.
We had a couple of less than fully clear deals which were announced this week with Japan and Philippines details still to come. But against that, risk markets have just ground better and we're around all-time best levels for many of them, or close to. And so I guess when we're looking at it, it looks like really a lot of good news is in the price, not a lot of risk premia is there.
And lots of people seem to be also perplexed by that at the moment. So credit markets, I would say in the last week specifically, have been grinding better in the emerging markets. Local yields, just a couple of basis points lower to EMFX, small gains, although we've given back some gains in EM currencies against the dollar recently as well.
So net-net, we're sort of running something which is a bit closer to home in our EM views here. So John, as you said, we'll get into the credit part a bit later, but let's talk first about FX, which has clearly been sort of the main focus in this trade war, first-order effect kind of falls directly there. On EMFX, we reduced some of our bullishness a few weeks ago, as it looked like the market was overbought on some of our technical indicators that we followed pretty closely.
How are those indicators looking now and what do you think the stance should be for EM currencies? So I think overall for EM currencies, we outlined in our mid-year outlook that we are thinking more cyclically or structurally, maybe in a positive way about EM currencies given they are long-term cheap against the dollar, US assets are very well-owned globally, including by many emerging market countries, and that US growth exceptionalism looks to be normalising after many years. And so given we've been in this 14-year bear market for EM currencies, the stance that we tried to outline is we think that is turning most likely here.
And so that should give us a sort of more positive cyclical or structural backdrop. But these are FX markets, and so we also need to trade them on a shorter horizon, and for that we often rely on sometimes technical positioning signals to help us position around that. Our favoured metric for currencies is our EMFX risk appetite index, which you've probably talked about before on this podcast, and this signal actually went overbought in early July.
So that basically gives you a sell signal, it tells you the market is overbought, it gives a sell signal, and at that point we reduced some of our – or really our overall positive stance on EM currencies more tactically. This metric, by the way, has had an 87% out-of-sample success rate. Since we published it in 2019, it has given signals profitable 87% of the time, and 10 of the last 10 were profitable, including this one.
So we had a sell signal, EMFX gave back some gains. Unfortunately, it only actually lasted two weeks or so in terms of this signal, and has now moved back to something which is more neutral. So usually we would expect that to last a bit longer in this overbought correction, but this moved pretty quickly this time.
We have outlined that we'll look to add back once this neutralized. I think we're keeping a little bit of patience here. We obviously have next week's tariff deadlines to get through this time of year if your interseasonality is the worst for EM currencies.
So currently staying a bit more on the sidelines in EMFX at the moment, but I think that's a tactical view. I think the medium-term, longer-term positive stance still holds here. So Ben, let's turn to focus on EM sovereign credit markets, and maybe let's start with just a basic question of where we're at, right?
So what do valuations look like overall for EM sovereign credit for people who maybe haven't been looking at this market as much? Are you looking at spreads as attractive here, given the outlook, or how do you think about things? Yeah, in a word, Johnny, spreads look pretty stretched, and we don't think that they look particularly attractive precisely for that reason.
If we look at the EMV Global Diversified, which is really sort of our flagship JP Morgan index for EM sovereigns, we're currently, as of yesterday's close, at 302 basis points. That's multi-year tights. We're now through the tight of the year, which we had reached earlier in July.
And we're at the lowest level we've seen since before the pandemic, really the months right before the pandemic, January, February of 2020. We're about 10 basis points off of those lows, and we're about 40 basis points off of sort of the lows we've seen in the last decade, which would be in February 2018. Now, if we look at our new duration-weighted EMV Global Diversified, and we're going to be looking at this index more as we go forward, and this sort of corrects for some of the additional spread and yield that we see in our flagship EMV Global Diversified, which owes to a lot of defaulted names, which still are in there.
We're at 226 basis points, so basically nearly 75 basis points tighter than the EMV Global Diversified. That's at the lowest since 2018, and we haven't been below 200 in that index since 2007. So basically, we're just really approaching historically tight levels for spreads.
Now, in terms of whether these are attractive, we have been hearing over the last few years, given that we're in a much higher core rate environment, that all-in yields for a credit product, including EMV Sovereigns, still look somewhat attractive. Certainly, they've been higher than they've been in the last decade of zero sort of observed policy. Right now, all-in yields for the EMV are around 7.5%, but those are also at the lows of the range we've seen since 2022, when the Fed started this hiking cycle, even if they're about 200 basis points above the pre-COVID level.
So there's some additional overall sort of cushion, and investors, I think, feel like they're earning something there. But again, from a point of view of what's just the credit spread, it's extremely tight. In terms of, again, the question on attractiveness, we're cautious.
We think levels at these very tight levels are not, in terms of a risk outlook ahead, you've mentioned the second-half forecast of our economists. We basically think these levels are priced for almost a very low chance of recession right now. If we do start to get more adverse data, both in terms of growth and also inflation in the second half of the year, and some recession risk gets priced back in, we think that that can lead to some significant spread widening in the second half.
Great. So when you think about those tight spread levels in EM, do you think of that, is there something very EM going on? Is it just us at very tight levels?
Are there some really good technicals that we have? Or is this part of a broader way risk markets are pricing, and we could maybe compare to US credit markets or something like that? How do you see those comparisons?
No, I think credit markets overall are quite tight. And I would say EM sovereigns are tight, and EM generally is tight, despite what had been up until recently, at least optically adverse technicals. I mean, unlike US credit markets, where we've seen massive inflows in the last couple of years, we've been seeing ongoing outflows for EM hard currency markets and EM overall since 2022.
This year, we've now finally started to see that reverse a little bit. But I would say that overall, the tight spread levels are coming despite these outflows. I think technicals overall for EM hard currency, particularly corporates, but also sovereigns are not terrible or actually good in terms of cash flows, which are coming back in from coupons and amortizations vis-a-vis issuance.
So net issuance has not been a huge problem. But generally speaking, I don't think this is an EM specific thing. And we can say that we're tight despite less positive technicals than what we see in other credit markets.
We have seen as inflows have started to come back in since May and particularly June, I think that that can play into some of the reason why we've gapped tighter in these last months. And we're now back at these sort of really historical tight levels. In terms of comparing to US corporates, you know, I think we've had pockets of value that we can identify since the election, the US election in November of last year, particularly say in the double B space we've seen in the fourth quarter of last year, really on the back of extremely strong rally in US corporates and US double Bs, some relative value emerged between those levels and EM double Bs.
That kind of disappeared in the liberation day when everything spiked and then returned for a while in May. I'd say at the moment right now, spread levels premium over similar rated US corporates are kind of in line with historical or at least the levels of the last year or two, nothing really to write home about right there. Maybe a little bit of additional value we can identify in the single B space for EM sovereigns.
But, you know, nothing, you kind of have to squint to see something interesting there. Great. Got it.
So maybe we'll delve into a slightly more esoteric question about EM credit markets here. And usually we talk about credit markets generally and EM credit specifically using credit spreads as our metric of assessment. You've been obviously doing that already.
Lower spread, lowest premium, vice versa. And it's not often that we think too much about which spread we're talking about, exactly what it means. But there does seem to be some more focus on those questions at the moment.
And there's some discussion when we talk about our MB index, EM sovereign index. Are we talking about spreads to government bonds? Are we talking about spreads to swaps?
Why is there a focus on that? What does it mean? And then any implications of that?
Yeah. So for starters, we are talking about spreads to government bonds. So that's the levels we've been referring to now.
You know, a broad market phenomenon is that swap spreads have narrowed and they've become pretty significantly negative since 2022. If we look at SOFR swap spreads, they've gone from about 30 basis points negative to now around 55 basis points negative. Since the end of 2022, it's been sort of just a secular narrowing into a more negative space.
The reasons behind that, and JPMorgan has gone into this in the research in that space, have to do a lot with some of the overall factors impacting the Treasury market. Certainly supply increasing expectations for supply to increase, QT playing out, and then of course, all the fiscal concerns that broadly markets have been focused on and what can So if we think about, again, the ENB and the spread we're talking about, which is a government spread, if we were to think about a swap spread, the Z spread, we actually do see this additional, that negative spread and the increased narrowing in the swap market is played in, I think, you know, mechanically into what we see with the Z spread. So I was mentioning ENB on an earlier slide, but I think it's important to remember that on a G spread basis, basically at the pre-pandemic height levels, the Z spread is at 366, and that's still pretty wide to the pre-pandemic level we were seeing, which is about 310, 315.
Not to get too technical in this discussion more, but there was a switch over between LIBOR to SOFR at the end of December 2022 in terms of how we're measuring these Z spreads. So that added another 25 to 30 basis points to that level. We have to kind of at least be conscious of that when we're looking at Z spread versus historical levels.
But I would say all in, in this discussion, and, you know, depending how the investor is thinking about his or her funding costs or how they want to define credit risk, we are seeing a little bit of additional value here. And if we want to look at EM sovereigns versus the Z spread metric, perhaps another 30 basis points, give or take, let's say, to put it in that level. Great.
Well, thank you. I mean, it seems to me that sort of these things can change over time in terms of, you know, the comparisons. I sort of prefer the like for like over time, which is to look at the MB over spread to governments.
But, you know, I can see why, you know, there's obviously been quite a lot of changes in both of those markets and which one is preferred or people feel is the best metric. Yeah. I mean, certainly in a market where spreads are grinding tighter and investors are wanting to put money to work and justify it, anything you can find that looks like there's a little bit of additional value or framing it that way, at least becomes topical.
Yeah. Okay. Well, that brings us to the end of this JP Morgan, at any rate, Emerging Markets Focus podcast.
Thanks to you, 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. 2025 JP Morgan Chase & Company All Rights Reserved. This episode was recorded on 25th July 2025.