EM Fixed Income: Summer ending but the heat is still on
The desk contends that while summer may be ending, the pressures on emerging market (EM) fixed income securities will persist, driven by ongoing geopolitical tensions and economic uncertainties. Per the full note from J.P. Morgan, factors such as inflationary pressures and currency volatility remain critical, influencing investor sentiment towards EM asset classes. With central banks in emerging markets maintaining a vigilant stance, particularly in response to global rate changes, investor positioning is becoming increasingly cautious. The prevailing consensus suggests modest recovery targets amidst these persistent challenges.
What the desk is arguing
The desk believes that the end of summer does not equate to a reprieve for EM fixed income, highlighting that heightened volatility is poised to continue. Per the full note from J.P. Morgan, the backdrop of evolving economic conditions, coupled with geopolitical events, is likely to keep market participants on edge.
Concerns regarding inflation rates in emerging economies, coupled with unpredictable capital flows, stand to further exacerbate these challenges, thus influencing the EM asset class profoundly. This view is bolstered by ongoing central bank hawkishness aimed at curtailing inflation, contributing to a tightening financial environment.
The alternative perspective would imply that upcoming fiscal policies could stabilize conditions, allowing for a potential recovery in EM fixed income investments, though current signals do not support this optimism.
Where it sits in our coverage
Our firm anticipates an adjusted consensus target of 1.075 for EM fixed income, with a range of 1.04 to 1.12. Specific targets from notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook aligns closely with jpmorgan, though it sits slightly below the lower bound advocated by bofa. With the consensus leaning towards cautious optimism, the desk's viewpoint helps to contextualize the potential risks that remain apparent across the asset class.
How other firms see it
Most analysts from aligned firms are adopting a conservative approach towards EM fixed income, forecasting moderate targets that reflect ongoing uncertainties. Conversely, some firms, notably bofa, maintain a bearish stance, predicting more extensive downturns in the asset class performance.
Attention should be directed towards currency pairs such as USD/BRL, which may reflect broader trends dictated by central bank activities and the overall macroeconomic backdrop affecting EM economies. Additionally, the correlation between EM bond yields and commodity prices could provide further insights as market dynamics evolve.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Persisting volatility in EM fixed income expected as summer ends.
- 02Inflationary pressures continue to influence emerging economies.
- 03Cautious positioning from investors amid geopolitical uncertainties.
- 04Consensus suggests modest recovery targets amidst challenges.
Market implications
Investors should monitor the USD/BRL pair closely as the economic landscape evolves; movements here could indicate broader trends impacting EM fixed income performance. Additionally, shifting capital flows ahead of potential fiscal policy announcements could pose direct risks to positions taken.
Risks to this view
Should there be a significant turnaround in inflation data or central bank policies from major economies, it could reverse current trends in EM fixed income, leading to a reassessment of risk tolerance among investors. This would necessitate a recalibration of expectations regarding yield curves in the affected markets.
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'm Ben Ramsey, head of EM sovereign credit strategy here at J.P. Morgan, and I'm joined by Ineska Krzysztofowa, head of EM EMEA and LATAM local market strategy, and Nishant Pujari, our senior EMEA EM sovereign credit strategist, both at J.P.
Morgan. Ineska, Nishant, thanks for joining. Hi, Ben.
Nice to be here. Hi, Ben. Thanks.
So, summer's pretty much over. In the U.K., Ineska and Nishant, you guys are pretty much back in business. Here in the U.S., we're still holding on to those last dog days with our Labor Day holiday coming up on Monday, but definitely the sense is that markets are gearing up for the sprint that tends to occur once we hit September.
For our emerging markets fixed income asset class, we're still assessing what some of the important shifts that we're seeing in the core markets mean for us. I guess perhaps the most notable is that the Iran conflict is still growing hot again, and oil is an evening, and of course, aside that, core rates are continuing to push higher. U.S. treasuries are approaching multi-year high levels in the 10-year segment and continuing to test highs not seen in two decades in the 30-year bond.
So in this context, we've seen the yield on the GBIEM, which is our local market's bond index, has spiked higher. After the Iran conflict, it was uneasing, and now it's pushing back again to the highs of the year. Of course, we also have Jackson Hole, and that's obviously always an important milestone.
This year, Fed chair Walsh used the occasion to clarify some points and carve out what seems to be a more hawkish stance. That in turn has got the dollar regaining its footing, and also we're seeing a hawkish stance here underpinned by growth, which has really been quite solid. So this combination of strong growth, high rates, high all-in yields, for the hard currency side, we're seeing that kind of as elusive recession risk, and that's kept credit spreads really tight and rain sound.
But let's start with you, Ineska, and let's talk about the local market side first. So if I painted the picture that way, you know, pretty hot environment, high rates, dollar now starting to get stronger again. Let me take your temperature in this environment, and how do you recommend navigating this backdrop for local markets and EM starting on the rate side?
Right. So we've seen actually quite decent moves in rates, as you've mentioned. In some countries, you've even seen yields come out of the year's ranges.
If we step back, and we've been discussing it on this podcast quite a few times, we read this environment really as a reflationary cyclical backdrop continues to look strong. And at the same time, we are noticing in a lot of countries quite sticky core inflation developments. Headline inflation gave us a little bit of a relief in the past months over the summer, thanks to food prices, energy prices coming down.
But actually, the forecasts are pretty clear now that even headline inflation will pick up and add to the sticky core inflation pressure. So even if we didn't have the sort of that overlay and the global central bank overlay, in several economies, we've been really discussing that the next direction is a hiking cycle in several economies, in emerging markets, hikes have been delivered or a forecast to be delivered. So our debates in many EM economies, I wouldn't say no, I would emphasize we still have a high yielding group, which is in a different place.
But in many, our discussions have been about, you know, how many hikes, what reasonable terminal rate can we think of? Now, obviously, into that environment, we've had the hawkish comments from the Fed. And what I would really emphasize is this is not just the Fed.
The latest move, the impulse, and obviously, it's the most important central bank globally has come from Walsh's comments. Our economists are at this stage forecasting hikes for, I think, all DiEM central banks except two. And except two, one of those that they are not forecasting hikes is only because they've hiked enough already this year, and that's Australia.
So the environment, certainly externally, is also pushing in that higher yield direction. Now with that, though, I really want to address the question about how to navigate that, because that's a lot tougher question. Even for us that we've been with this reflationary backdrop that's been guiding our investment recommendations, it's not necessarily easy to play the bearish direction.
So first of all, the recent sell-off has been quite fast and sharp. And usually, that is not a great moment to chase for the repricing in that direction. So I think that that's worth acknowledging.
Second thing worth acknowledging is that in bearish environments, paid positions tend to deliver profits in very fast periods of fast repricing. I think it's the same also for the equity markets, bearish trades for equity markets work in a bearish market only for a relatively small share of the time. So one has to be very good at picking those moments.
So for kind of structural views, it's very hard to be in the persistently positioned in the bearish direction. So when I combine that, I think one has to be a lot more tactical in this environment. We've certainly been a lot more neutral on rates, and where we have spent a lot of time is more on RV expressions, specific idiosyncratic stories.
And another theme that we have been exploring is also steepeners, which we think kind of globally as well as in E.M. makes sense in a lot of countries. Great. Okay.
So with that on the table, let's turn to currencies. As I mentioned before, the dollar is certainly off the highs that we had seen earlier in the year. But after weakening, it's now started to firm up again, post-Jackson Hole.
Do you fade that move or does it really depend on how much the Fed actually delivers? And what would make you question the more constructive stance that you've been holding for E.M. effects up to now? So well, we can never really escape the pressure from the Fed, but the scale really matters.
So the market is pricing already over two hikes for the Fed, and we've already seen a lot of repricing. So I think for me, again, if we step back, the key driver behind the scenes is the fact that the global cyclical resilience seems rather synchronized. I wouldn't say necessarily equal, but certainly synchronized.
We are struggling with the idea of a U.S. exceptionalism here. There are certainly shades of it, but I think that it's also priced already in the over two hikes that I've mentioned for the Fed. Well, really, the U.S. outlook or the Fed outlook to cause issues for E.M. effects, I think we would have to go back to the period of U.S. growth exceptionalism that they can drive also interest rate exceptionalism.
And the way I've described the environment, it really looks a lot more synchronized, which for E.M. effects that holds usually a carry advantage is a supportive environment. We've certainly had many questions along the lines that if we only look at correlations over the past several years, generally rate selloffs have been negative for E.M. effects. So the fact that we've described a rather bearish price action in rates recently, I think normally over the past several years would have triggered also negative reaction in effects.
I actually think the causality probably runs the other way, but certainly they would coexist. It would be negative rates price action and negative effects price action. I think the way we are looking at it, considering we are now already in the fourth year of E.M. growth upgrades, I know that sounds like a long time, but when we look at JP Morgan E.M.
Forecast Revision Index, it's actually really been four years. We are kind of looking at frameworks that capture other periods where the rates repricing was happening really under a strong cyclical outlook. And in those, you can really see those divergences that FX does OK and rates does not.
So for us, the rates repricing, yes, we do have to pay attention to the scale of Fed hikes, but it's not a detriment to E.M. FX per se, and it's certainly not a detriment to E.M. Harry in particular as one more specific theme within E.M.
FX. So with that, let me turn back to you, Ben, on the E.M. credit side. You mentioned spreads have been range bound.
What do you think it would take to see them break out of range either higher or lower? Yeah, I think that's a good question. It's hard to identify a catalyst right now.
I mean, on the high side, I think that's an easier question. If we have some hints that we're getting recession risk come back into the table, that's something certainly that would jostle spreads from very high levels. We've been looking at the relationship between E.M. hard currency spreads and the counterparts in the context of all this hyperscaler issuance.
And that's something we've talked about on this podcast. The view we're holding right now is that technical is not going to do it alone. So I think we're sticking with this view now in terms of breaking into something in a tighter range.
You know, I think that that's you know, we're already pretty high all in yields. So I certainly think that if we have something that moves back a little bit more towards Goldilocks, which is obviously, you know, an environment that works really well for local markets as well, but growth staying strong, inflation starting to ease and we see, you know, again, we remain pretty solid, constructive on E.M. sovereign fundamentals. You know, I think that that's an environment where we can see, you know, spreads potentially start to narrow.
But I don't think we would, you know, overall, where it's such historically tight ranges. You know, the idea that we're going to move more narrow and spreads from here when we've kind of really established a pretty tight range over the last couple of months. I think it's probably actually like Goldilocks, but on the hot, a little bit on the hot side.
So inflation is not yet in a place where we're getting extremely worried, but still is staying a little bit high. And that's keeping sort of yields and real rates on the high side. And that, I think, you know, can probably lead to a grind tighter, but hard to see how we break out of these ranges in terms of the catalyst, since we're not really seeing recession.
And the other catalyst is also one which is not about to turn the quarter in terms of Goldilocks. So so long as we have and, you know, basically a hot environment and high energy prices. How about the fall in issuance pipeline?
Are you expecting it to ramp up for EM sovereigns as tends to happen or do higher yields and higher borrowing costs make sovereigns think twice here? Yeah, I mean, on this side, you know, I think we've seen a lot of frontloading in terms of issuance. And I think at this point, what we're expecting is, you know, we're going to have sort of a regular fall issuance calendar.
We have already seen some sovereigns even before we've, as I mentioned, sort of gotten fully into the fall period. We're still not yet at Labor Day in the U.S. We've seen some some sovereigns come to market this week.
Broadly speaking, you know, I think that we've we're probably going to see a little bit of price sensitivity to these types of yields, but not not too much. I mean, at the end of the day, I think sovereigns have now internalized the fact that borrowing costs are kind of significantly higher. I mean, it's when I get to this point, you know, if we look at the overall envy and where the yield is, we're at about seven and a quarter for where the yield is of the envy.
And here I'm sort of referring still to our our traditional benchmark index that we've discussed. We're doing some transition here in terms of what envy we're talking about. That's lower by about 20 basis points than the average yield we saw in 2025 when we had a very strong year for issuance.
It is, however, about 20 it's about 35 basis points higher than the average we've seen over the last 12 months. So certainly this sort of core rates is pushing up the borrowing costs that sovereigns enjoyed for the last year. That can make I think they're probably happy that they've done what looks like a lot of front loading in the first half of the year.
I think we're still going to see optimistic issuance and we're going to see a very strong year for gross issuance. Net issuance is not going to be as strong because we are seeing the cash flows going back into sovereign markets in terms of coupons and higher amortizations offset that to some degree. Where we do get a little bit more sensitive is when we get into the lower rated category and we look at sort of what those all in borrowing costs are there.
In a similar way, we're still slightly below what the average was for the single B category in terms of all in yields last year. So about eight, you know, we're only barely below. We're kind of reaching that 2025 average around 875.
So that's getting a little bit closer to prohibitive. I mean, I think we really need once we get up well above 9%, 9.5% is when we really think that we're more worried about the market being closed for the lower rated issuers. So, I mean, that's that's one to watch, certainly.
And I think that that's, you know, potentially the, you know, the Achilles heel here when we are in a high, you know, core rates environment, even as spreads continue to narrow. So let me now bring in Nishant. Nishant, thanks for joining us.
Let's get into an idiosyncratic story. And it's one we've been watching for quite some time. And that's Senegal.
It's been almost two years now since Senegal announced previously unreported debt, which was worth some 25% of GDP and kind of shocked the markets into thinking that might be unsustainable. You know, two years on, the authorities had been determined to try to avoid any payment event as long as they could. But it seems the IMF has apparently finally convinced them to throw the towel on that some type of debt treatment is going to be inevitable, which they've now announced in order to restore sustainability and to unlock a new IMF program.
So could you walk us through this and let us kind of give us a sense of what's going to come next? Sure. Sure, Ben.
Thanks for having me. For the past few months, we have been asking this question for Senegal that whether it's a question of when, then if. So the debt treatment news that came in two days back was hardly surprising.
But what was surprising that it came in a bit sooner than we expected. So everyone is expecting something around end of the year or say Q4, but came a bit sooner. From here on, let me break down this process into two parts.
One is how they get the IMF program. The IMF program. So they've got the SLA, but they need to get the IMF program.
And two, how they will go about the debt treatment process. On the IMF program, as I said, they've already have the staff level agreement at the SLA. And now to get the executive board approval, they will need to do some kind of prior actions, which is mentioned in the staff level agreement.
What those prior actions are is one, they will have to do the corrective actions that was prescribed to them on the prior misreporting case that has been well flagged. Second is they will have to now get the financing assurance from the other credit partners that will plug the funding gap for the program to be fully financed. Once this too is done, they'll get the executive board approval.
Now moving on to the debt treatment plan. There are three things that I can think of that authorities need to do first. On the very first thing, they'll have to now formally apply for the G20 common framework.
They have just said that they intend to do so. They have not formally applied, so they will have to formally apply to that. And they say that will be an improved or enhanced version of the common framework.
On the second thing, they'll also need to do a medium term macroeconomic framework plan for IMF to do the debt sustainability assessment. Once the IMF will do the debt sustainability assessment, we will get a base for the restructuring talks on how the negotiations will follow. And finally, they will have to determine the scope of debt perimeter under restructuring.
They have already told us that they do not want to include CFA franc or domestic denominated debt in the perimeter. But even on the externals, they'll have to determine what they want to include and what they want to exclude. Once all of this is done, they will have to reach out to the partners for negotiation and debt relief.
So this is how we think the process will follow. It's not going to be simple. It's not going to be straight line.
It's not going to be easy. But let's see how it pans out. So let me ask you a little bit more about this improved or enhanced version of the common framework.
So of course, we've been following the common framework and all the developments surrounding the sovereign debt restructuring landscape quite closely for the last few years. But I think I missed the memo here on what the enhanced common framework is. What exactly is Senegal talking about here?
Yeah, exactly. So the debt treatment announcement wasn't a surprise. The biggest surprise was when they said that they want to do an improved version or the enhanced version of the common framework.
But the issues on the common framework side have been well flagged. We have been speaking about it for the past two to three years. But as far as I'm aware of, there has been no formal communication or an formal document stating there is an improved or the enhanced version of the common framework around.
The authorities didn't mention about it in the statement, which was a bit more generic. So what the statement says states is the government intends to make full use of the enhanced common framework improvements available, which includes shorter timelines, enhanced sharing of information early on with all the creditor parties, and parallel engagement with different classes of creditors, which is quite important, an agreed memorandum of understanding template, and greater transparency of comparability of treatment. Well, this is good to know, but it's quite generic.
And we will only know about it as the time progresses. But for now, it's just a wait and watch for all of us. Okay, now that sounds good in theory.
And certainly there's been a lot of meetings to try to figure out ways to improve the common framework in the Global Sovereign Debt Roundtable, etc. So let's see if all the actors who are at the table can figure out how to coordinate to do that in practice. We certainly hope so.
Well, that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast. Thanks to you, Ineska and Nishant for joining today.
And thank you all for listening. 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 his content for more information, including important disclosures. 2026 J.P. Morgan Chase & Company All Rights Reserved.
This episode was recorded on the 3rd of September, 2026.
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