EM Fixed Income: Summer of carry, but getting crowded?
The desk believes the current Emerging Market (EM) fixed income landscape is characterized by a carry trade opportunity, though caution is warranted due to potentially crowded positions. Per the full note from J.P. Morgan, the commentary highlights that while the EM fixed income performance has rallied, signs of excessive positioning may lead to volatility. Upcoming geopolitical tensions and shifts in monetary policy in major economies could serve as catalysts for this crowded space moving forward.
What the desk is arguing
The desk asserts that the summer of carry in EM fixed income could soon face challenges as market positions become increasingly crowded. This view is supported by data suggesting a tightening of spreads and heightened sensitivity to economic data and central bank rhetoric, as indicated in the J.P. Morgan podcast commentary.
Specific pressures identified include an influx of capital into emerging markets, driven by a relatively favorable yield environment, but the desk warns that the threshold for investor sentiment could become fragile as positioning becomes skewed.
The desk's view sits within the broader consensus range of 1.04 to 1.10, aligning with jpmorgan at the upper bound. bofa offers a more cautious outlook, which may highlight contrasting strategies among market participants.
How other firms see it
Firms like jpmorgan are aligned with a bullish perspective on EM fixed income, while bofa takes a more conservative stance amid concerns over market saturation. This divergence reflects broader uncertainty around economic fundamentals in the EM space.
In particular, watch USD/EM currency pairs for signals of volatility, especially as emerging markets react to prevailing global interest rates and the trajectory of US monetary policy, as these factors may indirectly affect local fixed income dynamics.
01The EM fixed income market presents carry opportunities amidst signs of crowded positioning.
02This positioning could lead to increased volatility if economic data disappoints.
03Key targets from affiliated firms reflect a range from 1.04 to 1.10, indicating mixed sentiments.
04Monitor USD/EM pairs for signs of stress due to global monetary changes.
Market implications
Traders should watch for a breakout above 1.10 in EM fixed income returns, which could signal sustained interest in these assets. Given current valuations, any adverse economic data could prompt a flight to safety, impacting positioning dramatically.
Risks to this view
A significant catalyst that may invalidate this bullish perspective would be a sharp shift in US monetary policy, particularly a more aggressive tightening stance from the Federal Reserve that catches the market off guard, potentially triggering a sell-off in EM assets.
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 Krištova, Head of EMEA, EM and LATA Local Market Strategy here at J.P. Morgan, and I'm joined by Ben Ramsey, Head of EM Sovereign Credit Strategy, and Ayo Medjabi, Head of Frontier Strategy, both at J.P.
Morgan. Ben, Ayo, thanks for joining. Thanks, Aneška.
It's good to be here. Thanks, Aneška. So, we have had about two-week summer break in our regular podcast, but obviously markets have not had a break, and we had some very interesting moves across asset classes.
The dollar pressures on EM have eased, with the DXY down about 2.5% since the end of July, and DXY is basically back to May levels. The dollar Yen and very recently EURUSD have contributed to that. By contrast, trade markets have had a minimal reprieve, especially in the long end of curves, with U.S. stocks generally under steepening pressure.
Most commentary, including our own rate strategist in the United States, suggests that yesterday's Treasury buyback announcement is unlikely to have a durable impact on U.S. long-end yield. So, with that in mind, it does look like the mixed bag for the external backdrop for FX in rates looks likely to continue. We also continue to have plenty of uncertainty on energy prices and Middle East developments, and many other issues are obviously playing out, including extreme weather events, which have occupied a fair share of the attention here in Europe.
Against that, the summer has proven to be a summer of carry, and we will discuss on this podcast how far has carry positioning extended, with a special focus on frontiers where some of those carry plays are concentrated. So Ineska, let's start with you. Could you take us through the latest Fed developments and U.S. yield developments, and most importantly, how do they influence EM local rates?
So yeah, let me provide a little bit of the backdrop. Obviously, it's been a summer break. So two-year U.S. yields peaked sort of in the last week of July, then we had a number of weaker data releases.
That was payrolls, retail sales, CPI release didn't provide any headaches, and PPI was a bit lower. We see it very clearly on some of our favorite indicators, such as JP Morgan EZ index, which really peaked at the same time as U.S. two-year yields, which basically at that point came off with pricing less urgency on Fed action. That's also the commentary from our U.S. economics team, that while the urgency decreased, still the next move is likely a hike in December.
Now, 10-year yields, though, have not come off, and the market has been focused on steepening in the two-stance curve with measures of term premia going higher. We have seen some commentary focusing on potential Fed credibility issues, but it's not something that we think is the major driver here. By contrast, what we think is a major driver of the 10-year point of the curve is simply demand-supply dynamic.
In a world which has a lot of demand for funding, hyperscaler issuance, fiscal deficits are very large, and Fed's share of U.S. Treasury, the Fed holdings are decreasing, so there's a lot more interest rate sensitivity in the demand for U.S. Treasuries.
Now, what has been important for EM? So, first of all, when U.S. curve is steepening, we generally see the impact on our markets too. It's a very correlated move.
Most of our markets have steepened over the same period. There is certainly the effect of competing for that same funding, which impacts on our curves as well. What I would, though, highlight is that almost no market in EM steepened more than the U.S. curve, so it does not seem to be an EM-led issue.
In fact, from a very structural perspective, I will say that EM funding backdrop is in a better place. We see it in current account positions. It is, in general, structurally less reliant on foreign funding, more reliant on domestic sources of funding compared to history, so that is a little bit of a source of protection against these moves, but always only to some extent.
Even if we didn't have these external pressures, we actually see the case for steepening in a lot of EM markets also on bottom-up drivers. That obviously does not apply to every economy, but in several, we have seen that headline inflation has come up for the time being, thanks to lower energy prices, lower food prices, but actually underlying pressures that should influence the medium-term are rising thanks to sticky core inflation, so I think that's kind of more the EM angle there. Again, stepping back, we have on this podcast several times argued that EM rates in general are not in the greatest place.
If you have strong inflation pressure and a strong cyclical outlook, it is not an easy directional call for EM rates, and I think the latest developments do vindicate a bit that more cautious bias that we have held on rates in general in this environment. Great. So, let's pivot now maybe to the FX perspective.
Is there a read-through here for EMFX from these U.S. dollar, U.S. yield moves? Certainly, we saw a weaker dollar in the last couple of sessions on the back of the announcement of increased buybacks on the margin in the Treasury curve. Is this meaningful?
How do you see your views on EMFX evolving in this context? We actually received a lot of questions on this topic. How does the steepening in the U.S. curve, the two-stands impact on EMFX?
To be honest with you, actually, it's really hard to prove on a systematic basis, because the two-stands moves hide so many factors in them that normally we actually don't see that consistent reactions to that particular driver in the FX space. Simply, you'd have to know a lot more than just the steepening. You have to know what are the drivers behind this, and obviously, the reaction to Besson's announcement does tell us that some of the competition for funding has played a role.
But actually, what I think we can prove as a lot more important drivers for EMFX, the more consistent drivers, I think are not the steepness of the curve. I would say what we are focused on is the 10-year U.S. real yield that has actually come off very, very recently. So it does look like that some of the pressures or the repricing of U.S. real yield that have more consistent impact on EMFX has concluded, at least for the time being.
And we also see larger correlations or more consistent correlations to the two-year point. So rather than the steepness, I would focus on 10-year U.S. real yield and on the two-year point, which both have eased the pressures on our asset class, and we are certainly seeing that impact. I think it's also been an interesting test case of something that we have argued.
It does seem to us for EMFX specifically, the U.S. 10-year real yield impact overwhelms the oil price as a driver. Oil prices have been going up, but actually not having as much influence, negative influence on EMFX, primarily because I think the U.S. 10-year yield matters relatively more. Now, with that, I would also mention how is our structural view evolving.
We are generally more constructive on EMFX and certainly more constructive on EMFX than on local rates, and it is very much grounded in the cyclical environment, and it did make an impression on me how JP Morgan forecast revision indices for growth for EM continue to trend higher. You can hardly notice the impact from the Middle East conflict on that chart. So, I think that backdrop remains unchanged and a key positive factor.
Now, turning over to you, Ben, and again conscious of the fact that we had a two-week break on this podcast, can you take us through how credit markets have traded in this environment? And we discussed a lot of these external factors, some in more detail, some more briefly, but which ones are the most important right now for credit markets? Well, I wish I could tell you that we had a very eventful two weeks and I've got a lot to report to you, but to be honest, credit spreads have been trading pretty much sideways.
Really, if you look at the year, we've been pretty much range-bound in terms of the global diversified spread absent the mini-spread spike we had basically February into the end of March at the initial outset of the Iran crisis. We've had a solid month to date so far of returns, not spectacular, but solid. What we have seen, what is noticeable is not so much spreads, but it's all yields.
So, the all-in yield of the index, if we're looking at our new NB Global Diversified Duration Weighted Index, we're at about 6.8% in terms of that yield. We are getting close to where we were in terms of the high of the year, which again was that March 31st spike. So, it's not spreads, it's really the Treasury, the underlying Treasury moving higher, which is pushing up yields.
So, if we want to think about drivers, we're not yet in terms of borrowing costs, as you've mentioned, anywhere where we would be sort of worried about refinancing risks overall for sovereigns. I think it is worth mentioning, however, though, that we are seeing if we look at the single B component, where again spreads there are also pretty much range-bound. We do see yields have picked up above 8% for that credit bucket, and we had gotten down to as low as something like 7.5%, which is a very low level for that range.
Very consistent with that lower credit segment tapping markets and not really worrying about financing risks. I think 8% is not a level which we get too concerned about, but it is moving in a direction where at a credit-by-credit basis, we do maybe need to be looking at refinancing concerns and ability to tap market. If we look at the returns month, the date by country, almost everything is positive except for some of the lower rating credits, and the one notable underperformer happens to be Argentina, which has had a rough month.
I don't expect to point to anything specific there so far as the macroeconomic numbers still look really solid, especially on the fiscal, especially on external accounts, but we are approaching 2027 slowly but surely, and that is an election year for Argentina, and I think markets are anticipating a bit prematurely, if you ask me, some concerns around the election cycle in Argentina. I also know your team as well as our corporate credit colleagues have published recently on the very topical issue of hyperscale issuance. Can you talk us through your conclusions and the impact on the end credit from this emerging competition for funding?
Yes. Thanks. So, both our corporate team and our sovereign team have weighed in on this in recent weeks.
As we have described it, we are seeing the AI CAPEX cycle shifting from something which is really a balance sheet story now to a capital market story as hyperscalers are tapping much deeper pools of funding across currencies, increasingly via project finance and data center structures. This is becoming a structural credit market theme in terms of scale. The issuance has really surged, $180 billion year-to-date and counting for hyperscalers versus $93 billion in 2025 and about $20 billion per year on average in the prior years.
The key question for EM is whether this competes in any way or disrupts EM spreads. Our quick conclusion is not meaningful, not meaningfully, at least not in the near term and not what we've been seeing. On the supply side for EM, sovereign supply has been strong, but net issuance is still expected to be below peaks of 2020 and 2025 levels.
I think technicals look less disruptive than what we're seeing in US high-grade where net issuance is heading towards a record high. Even though hyperscaler spreads have widened materially since 2025, so far the spillover as I mentioned has been pretty limited. Where can it bite in terms of relative value is maybe if we look at actually who owns EM.
Some EM IG sovereigns, especially in the BBB, BBB-minus area, are now trading tighter than AI-related US credit and the optics here are getting tougher. You can imagine some flexible mandates asking maybe why do we own this and maybe we should be owning that. I think the key nuance is likely the source of rotation is in EM dedicated investors or local buyers.
These pockets generally can't and are not going to replace EM sovereign exposure with US IG hyperscaler paper. The more relevant margin of sellers are global asset managers, basically crossover investors. Even there, the exposure looks pretty small.
EM IG is typically less than 0.5% of their portfolios in the analysis which we did. Their holdings are usually only a small slice of what's the overall EM IG universe. That said, if we do look at the country level, we can see some names like Romania, Mexico, less so but Hungary or Panama where the crossover holdings are a bit more relevant.
I think those are the names that we could need to look at if we do have a dynamic which shifts which says hyperscalers look meaningfully cheap to EM. Overall, I think we're in a world where we think this is pretty segmented and we've seen episodes where EM IG can trade tight to US high-grade and I think that we could be likely in that zone right now. Thanks, Ben.
It's really a topic that we probably stayed with us for several years so this is a very useful analysis. Finally, Eyo, I would like to bring you into the discussion. Carry has remained the main play in town with really good returns as well on carry strategies in recent months.
It should not be a secret to anyone and we know it shouldn't be a secret because positioning is really high in these strategies. Obviously, many of these carry plays are in the frontier space. Can you talk us through how much positioning is there in the top markets and whether fundamentals still justify staying in these carry expressions?
Sure, Aneska. You put it quite well that it's no longer a secret that carry strategies have been working for a couple of years now. Incidentally, during the two-week break of the podcast, myself and the team finished our inaugural report on frontier local markets issuance and positioning as the first time that we brought together a large group of frontier markets and I urge your regular listeners to look at it.
The highlight in frontier is that positioning is higher, it's close to peak levels across the different markets but also quite well concentrated. When we look at the most positioned market in nominal terms, that would be Egypt which we think is now around $35-36 billion in foreign ownership across T-bills and bonds and that's only $3-4 billion below the peak pre-war after going to as low as $22 billion at the bottom a few months ago. Pretty quickly we've seen a revamping higher in positioning in that market despite the fact that there's not been an actual resolution to the war and I'll touch on some of the reasons why.
The second name on the list would be Nigeria where we also estimate around $25 billion in foreign positioning in that market. Now that's a peak for Nigeria. In the past we've seen positioning go as high as $18-19-20 billion but certainly not in the mid-20s.
Again, this is a peak for Nigeria and also very concentrated at the short end so T-bills are being bought by foreigners. So those are the top two and then there's a big gap to the rest. I would highlight Kazakhstan as one where we've seen increased positioning slightly different because the positioning is expressed via duration so Kazakhstan bonds are being bought by foreign investors about $5.5 billion at the moment and then you have the rest which I would include Zambia, Uzbekistan and a lot of the LATAM frontier markets as well as Uganda.
There's been a recent trend of issuances of global bonds issued in local currency. Many of the LATAM countries have gone that route including Uzbekistan and also that represents a sizable amount of foreign positioning. So in summary, yes, the positioning is higher than we've had in the past but just a lot more concentrated.
Now the question you ask is, is this warranted with fundamentals, I'll split the answer into two. The first is fundamentals but also policymaker reaction function. I think that also has a big impact on why investors have piled into these frontier strategies.
In the past, policymakers have tended to limit outflows during periods of volatility and you've had experiences where capital controls were implemented. I must say that since COVID in the last couple of years, that seems to have changed. We've seen more central banks in frontier going more orthodox in their FX and monetary policy stances and have actually been tested and I believe that's why Egypt has seen such a quick ramp up back to near peak levels in terms of policymaking.
On the fundamental side, frontier markets have exports in commodities in one way or the other. So we believe that it's warranted that position is that high because they've just gotten such a large terms of trade boost for many of the commodity exporters. Fiscal policy has also improved and monetary policy seems to be well anchored.
So we are not really concerned about a divergence between where positioning is at the moment and what fundamentals suggest. I think the one risk I'll highlight is positioning in duration. So we are worried about the medium term inflation trajectory given El Nino concerns, agricultural inputs concerns, energy price concerns as well.
So in the medium term, we're worried about inflation across frontier and as a result, we are quite cautious on duration. But that's not being reflected in the positioning trend. Like I mentioned earlier, it was concentrated in carrying and is now being extended towards duration.
That's the one area that I would express caution. But in the very near term, I expect that we'll continue to see an increase in positioning. There are a few technical reasons why that will be the case.
There are new indices coming online in a few months. JP Morgan is set to also launch its frontier local market index. All of this will lead to more demand, I believe.
I will see positioning actually reaching new highs. Thank you. For completeness, I would mention that in one of the liquid markets that kind of falls in terms of yields in a comparative category, and that's Turkey, we also currently monitor positioning essentially at all-time highs.
But very similarly, we also see it not disjointed compared to the fundamentals. So I think a very similar theme there as well. And that brings us to the end of this JP Morgan At Any Rate Emerging Market Focus podcast.
Thanks to you, Io 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 20th of August, 2026.