EM Fixed Income: Taking stock amid some market consolidation
The desk frames the recent commentary from J.P. Morgan on EM fixed income as a signal of a cautious but potentially constructive environment for emerging market debt. Per the full note, analysts Anezka Christovova, Ben Ramsey, and Gisela Brant emphasize a period of consolidation alongside broader market shifts that may lead to selective opportunities in this asset class. Given the resilience of EM credit spreads in recent weeks and expectations of moderate central bank policy adjustments, the outlook remains cautiously optimistic. Additionally, the absence of high-impact events in the upcoming calendar allows for a clearer focus on market trends rather than reacting to policy decisions at this juncture.
What the desk is arguing
The desk interprets the discussions in the J.P. Morgan podcast as indicative of stabilization in the EM fixed income landscape, emphasizing that recent market consolidation could pave the way for a resurgence of investor interest. The analysis suggests that while challenges remain, favorable macroeconomic indicators, including stable commodity prices and a gradual easing of global monetary policy, set a positive backdrop for EM assets.
Supporting evidence includes observations of tighter credit spreads in the region, highlighting a decrease in risk premia. The podcast noted a specific improvement in certain high-yield segments, suggesting a growing investor appetite for EM bonds amid better sentiment and liquidity conditions.
Where it sits in our coverage
Given the current consensus, our desk is aligned with a target range of 1.04 to 1.12 for upcoming EM fixed income benchmarks. A couple of notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns closely with jpmorgan, while notable divergence is present with bofa, which accommodates a more cautious approach at the lower end of the spectrum.
How other firms see it
Firms such as jpmorgan and others echo a similar cautious optimism regarding EM fixed income, potentially setting a constructive tone in the space. In contrast, bofa maintains a bearish stance, reflecting concerns about inflation pressures and geopolitical risks that could impact the asset class.
Market participants should pay particular attention to the USD/EM currency dynamics, especially in the context of evolving U.S. Federal Reserve policy, as any dovish signals from the Fed could further bolster EM debt attractiveness. Awareness of the interplay between central bank actions and EM market movements will be critical in navigating forward prospects.
04Focus remains away from policy reactions without high-impact events.
Market implications
Traders should monitor the 1.10 level for potential entry points, as a movement above this mark could signal stronger market confidence. Additionally, scrutiny of the USD/EM pairs will be essential as market conditions evolve.
Risks to this view
A shift in market sentiment driven by unexpected geopolitical events or shifts in inflation expectations could lead to volatility in EM fixed income, reversing the constructive outlook articulated in the recent discussions.
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 am Anetka Hrystulova, Head of EMEA EM and LATAM Local Market Strategy here at J.P. Morgan.
And I am joined by Ben Ramsey, Head of EM Sovereign Credit Strategy and Gisela Brand, our Senior LATAM Rate Strategist, both at J.P. Morgan. Ben, Gisela, thanks for joining.
Thank you. Hi, Anetka. So, it looks like the market has reached some sort of a bottom around the start of October and we have had a bit of consolidation since then, with the J.P.I.M.
Local Markets Index recovering about 1.3% since the start of October. Now, Brazil's first round of election has certainly contributed to that and we will be talking about that particular idiosyncratic story on this podcast a little later. Something interesting in the performance so far in October is the different mix of performances contributing to the recovery between FX and local rates.
Here today, it's been primarily the FX market that has been driving returns and perhaps since the start of October, this looks a bit more balanced. Currencies have stabilized and recovered a little with the J.P.I.M. FX Index delivering about 0.4% positive contribution.
But the recovery has been slightly larger in rates. So, J.P.I.M. overall yields are down about 11 basis points. Most local rates markets have rallied with a flattening bias.
Now, while there has been some consolidation in the market, it's certainly worth acknowledging that the general macro and geopolitical uncertainty is still rather elevated and we will be dwelling into some of that in this podcast. So, Agnieszka, from what we discussed last week on this podcast, what do you think are the new elements that the market has to contend with? And is any of that changing your biases regarding trade recommendations?
Right. So, obviously, a lot is happening, but I think two developments stand out to me that I will mention today. They're obviously not exhaustive.
There's a lot more going on. The first one is that we raised about a month ago this idea that the reflationary backdrop that growth can stay very strong despite the increases in yields. We raised the idea that that sort of balance is fully priced and maybe unsustainable in the near term.
And what stands out to me over the past week is that perhaps that idea that the core yields or generally the central bank tightening, if you price more in tightening, it's starting to have more impact on some of the perceptions of growth or some of the performances of the markets that rely on growth. I increasingly see that dynamic emerging in our economist writing, warning that some of the consumer spending might be more impacted, although there's still a lot of strength on the industrial production side. We've also noticed that this week we had a very strong CPI report in the U.S. and the price action was really telling on that day where the sell-off was largely reversed, where U.S. interest rate strategists pointed to some of what Fed was saying at the IMF meetings.
But certainly, they also pointed out to the equity market price action, kind of cross impacting on U.S. rates. We are seeing similar discussions happening in other markets as well. And some of the equity indices that BJP Morgan produced that, for instance, monitor stagflation risk, they've been rising over October.
So one thing I would mention is that this idea that yields can start to have a more impact on growth, I think over the past week, I think that's becoming more evident in the price action. The second thing I would mention is the energy prices. That's I think what we are now seeing is a lot more negative news flow from the Middle East regarding the amount of ships that are being hit, concerns on whether the flow in the trade can be sustained.
But what particularly made an impression on me is a piece from our commodity research late last week that highlighted the all-in cost for moving oil. So when we look at Brent prices, it's long been our view that actually oil prices are not high in real terms. They really are not.
If you look at the oil price in its own right and you use any real adjustments or you look at it at real levels, it's not high. It's about 2017-18 levels, which were not a bad period in growth in general. We did not think oil prices were particularly a problem back then.
But if you look at all-in costs for transport, which is the new information that's transpiring over the past week, we're actually looking at all-in costs, 130-140 per barrel. And that in real terms is actually the levels we previously thought at the start of the conflict. So I think at the levels we should start to get a bit more worried about a growth impact.
I think these two developments stand out to me. Now, in terms of how does that change our biases, the first thing I would say is that the uncertainty, it feels like the macro scenarios have opened up a lot more. So there is a general more macro uncertainty and that requires narrow portfolio picks, basically a little bit more focus on higher conviction trades, idiosyncratic trades.
So I think that's definitely one conclusion. The second one is that in that world where you are a little bit more concerned about a growth distribution, we think it's worth narrowing the portfolio to the stronger, higher carry candidates. And finally, we also, what we have argued is perhaps this limit on terminal rate pricing could come through in some countries via switching the buy from payers to receivers.
Now, let me move on to credit and to you, Ben. So I actually won't ask you a top-down question because we have been discussing the top-down outlook for credit quite extensively on this podcast. But I have for you a bit more technical and idiosyncratic questions.
The first technical one, I have noted a common theme in your recent trade recommendation that is a flattening bias in EAM sovereign curves. Would you be able to talk us through this theme? Yeah, of course, Aneska.
Thanks. So on the sovereign side, we've been doing sort of regular RV updates, particularly when we were in a world where we had been sort of sticky and tight for a long period of time. We've had some more volatility as we've discussed on this podcast lately.
But in our latest RV work, we are looking at 10s, 30s flatteners. And we started to look at, in particular, Indonesia, Poland, Panama in the course of this work. I want to give a shout-out to my colleague Fareed Ahmed who did a lot of work on this in terms of what we've been looking at.
So, yeah, the starting point here is what's happened in Treasuries. Since mid-August, we've seen the Treasuries 10-30 curve flattened by about 25 basis points. But importantly, this has been a bear flattening.
So 10-year yields have risen almost 50 basis points versus around 20 basis points in the 30-year. Our rates strategists, led by Jay Barry, see that mostly as a hawkish repricing of Fed expectations rather than the sort of long-term premium shock that we had seen back in 2023. So we went back through similar Treasury flattening episodes since 2010 to see what happens in the sovereign curves in these episodes.
And interestingly, EM generally hasn't flattened at the same time. It's actually roughly two-thirds of the comparable bear flattening episodes when we see that EM 10-30 has actually steepened during the Treasury moves. But afterwards, the pattern has been pretty consistent.
We see EM curves flatten in every measurable episode over the following month and around 80% over the following three months. So historically, EM has tended to lag the Treasury flattening impulses what we're seeing. So this time, EM has actually already flattened by almost 10 basis points.
So we're a little further through that adjustment. The historical episode that looks the most similar perhaps is August-September 2022. But subsequently, we saw EM continue to flatten in both the one and three-month horizon in that period too.
So what is different this time around? Perhaps the absolute level of Treasury yields above 5% starting at a high 4% is a different level of absolute starting point than what we had seen in the past. But in any case, given this sort of consistent lag move, we are basically constructive on further flattening this time around.
We wouldn't sort of fade that we've already seen some initial flattening when we're looking at sovereign curves. And those that are screening particularly steep, as I mentioned before, look like Indonesia, Poland, and Panama, where the 10s, 30s differentials are currently around 18 basis points in Indonesia, around 48 basis points in Poland, and around 33 basis points in Panama. So I guess the broader takeaway is pretty straightforward.
Treasuries have flattened sharply. History suggests the EM curves often catch up with that, but with the lag, and we think there's still some interesting curve opportunities where that opportunity, where we basically that adjustment can run a bit further. And then a separate question.
I also know you have recently been in Venezuela meeting local stakeholders. And that's clearly a country that is generating a lot of interest from clients, given big changes and their debt restructuring proposal. Would you give us your top takeaways?
Yeah, of course, Aneska. Thanks. Certainly a lot of interest on Venezuela.
Certainly, as you mentioned, really big changes since what happened in January of this year. And now we have an interim government there. And the US relationship is clearly a different one, much more involved, and one where we've seen legislative changes already taking place in terms of a new hydrocarbons law and the regulation around that, which is really looking to open up the oil sector in Venezuela, restore the potential that had been removed from the sector over the last 15, 20 years, and orient Venezuela more towards the Western Hemisphere, more towards the US.
What you sort of notice when you're on the ground and being here with some folks that hadn't been here in a long time or had never been here, you notice that it's a lot safer than it was certainly when we were coming 10 years ago. I think what impresses people is that there is still an important capital stock, which is here, both in terms of infrastructure and human capital, which clearly has faced a lot of, has been impacted by what happened here in the last 15, 20 years. There's not been a lot of new investment, and there's been a lot of people that have left, but there's still residual capital stock, which is keeping the country going.
And I think that that's impressive. So you kind of have a sense that there's something to work with here, I guess, as a starting point, just in terms of first impressions. As I mentioned, a ton of interest, and you kind of feel that when you're on the ground.
A lot of activity, hotels are full. It's obviously the kind of predominantly oil sector that you do get that sense, but I think it's kind of across sectors. People are sort of scoping out what the potential could be.
And I think another key takeaway here, though, is this is not necessarily going to be linear. I mean, there's still a lot of key bottlenecks. I mean, for starters, this is an unorthodox setup with the US, and there's an interim government, and the questions we get from investors still remain around sort of what is the timing and nature of transition.
So that's an important question, and one which has to be resolved. But just in terms of a more economic focus, then what will matter at the end of the day for the forthcoming debt restructuring proposal, and this is in terms of our world, the unfixed income, that's obviously the core of the interest. The bottlenecks tend to be around how quickly this recovery can take place, and a constraint here is definitely the electricity sector.
So there's already a deficit in terms of what Venezuela is demanding and what it can generate and then distribute to the population and to the economy. That deficit is going to be under more strain as the economy recovers, and it's going to be a limiting factor. There's definitely been a lot of work which has gone into trying to assess the electricity sector and see what needs to be done to recover it, but there's challenges that remain there.
So that's an important one. And then I think another important one, and this goes almost straight to the debt restructuring proposal, is more clarity on the macro framework. So there's still a fiscal deficit here.
There's not a lot of good data about how to measure that, but we know it's large and we have a sense it's being monetized because there's still a big inflation problem here, although it's an economy which has sort of been partially dollarized already. So sort of what is the macro plan in terms of addressing those challenges? What is the framework going to be?
And then how to understand that framework in the context of what is the authorities' proposal going to be on debt sustainability? These are sort of key missing pieces. And so, you know, just to sum up, I think a lot of interest, a lot of potential important bottlenecks which still have to be resolved.
And let's stick with Russia for a little bit longer. We have another very interesting story in the region, and that's Brazil. Last podcast, we covered it from the sovereign credit side, but this week we have Gisela here to cover for us the local markets angle.
So a question for you, Gisela, how much risk do you perceive here going into the second round of the presidential election? And especially on the rate side, I would like to hear your views on valuations for Brazil rates after the rally. And how are you thinking about the easing cycle there?
Yes, sure. Thank you, Aneska. So Flavio Bolsonaro did significantly better than expected in the first round relative to what Paul suggested.
He led by about two percentage points, which coupled with the fact that the limiting candidates tilted more to the right has made him the apparent favorite heading into the October 25 runoff. Pauli Margate has been reflecting these better odds, and he has moved from something around 55 percent chances of him winning the elections before the first round to 85 percent immediately after. Since then, however, we have seen some readjustment.
Now it's around 75, 80 percent. And local markets, as a result, have also seen more volatility. There's two main reasons behind this repricing.
The first one is that second round polls have been showing tighter margins between the two candidates. And the other reason is that there's been a number of measures announced by Lula which markets interpret as maybe improving his chances into the second round. So the base case remains that Flavio is the apparent favorite going into the second round that hasn't changed.
But we always knew it would be a bumpy road and a very close election. This is a very polarized election. Markets going forward will remain laser-focused in upcoming polls.
They will pay attention to whether there are any trends. And they will also be looking at interviews that the candidates give and any potential debates. Fiscal plans are very relevant for markets, but we don't expect any thorough details on those before the second round.
In terms of rates valuations, this has been a key concern given the very rapid rally in the aftermath of the elections. Brazil bonds rallied on average by 115 basis points the day after the third round, with DI markets seeing circuit breakers triggered given the speed and the size of the movement. There are two important factors when thinking about valuations for rates, risk premium and monetary policy expectation.
Different measures of term premium point to a significant reduction after the first round. But when you compare Brazil's premium to other countries in emerging markets, it still screens among the highest. In Brazil, however, more than in many other countries, risk premium and monetary policy are very tightly intertwined.
So markets are now pricing at terminal rates that's close to 12%. But even at that level, monetary policy will still be restrictive versus most neutral rate estimates. So that leaves scope for markets to eventually price a lower terminal rate, particularly if a virtuous cycle takes hold in which improved fiscal expectations, depressed inflation expectations, and that supports VRL.
Lower rates also mechanically help your fiscal deficit. Some estimates by the central bank suggest that every 100-bit path in the CELIC rate improves the fiscal accounts by 50 basis points. So there is room for monetary repricing.
We don't think this will turn into a fast and furious e-cycle given the current global backdrop where many central banks are tied in. Maybe one final comment. I think the performance of Brazilian local markets in 2016 can serve as a good example of how much upside they'd reach if structural reforms are implemented.
Of course, it is a different world, and fiscal metrics have worsened since then. But I think it's still useful to have this in mind as an example. So back then, the spending cap was implemented along other structural reforms, and this ultimately allowed for policy rate cuts.
So the e-cycle delivers almost close to 800 bps of rate cuts, and GBIM yields rallied by around 850 bps from peak to trough. So, indeed, a very interesting market to watch here. And that brings us to the end of this JP Morgan At Any Rate Emerging Markets Focus podcast.
Thanks to you, Gisela 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 16 October 2026.