Markets continued their strong performance in the final month of the year as positive economic data and declining inflation led to growing confidence among investors that the next move for central banks would be a dovish pivot. This gained further momentum through the month, predominantly due to the US Federal Reserve (Fed) signalling rate cuts for 2024, leading to a continued drop in US Treasury yields across the curve, with the US 10-year yield falling 45bps over the month to end the year roughly where it began, at 3.88%. Sovereign bond yields also fell across Europe, helped by a dovish European Central Bank. Elsewhere, lower energy prices contributed to benign inflation dynamics and supported various other bond markets across the globe.
In emerging markets (EMs), falling inflation in Latin America allowed several central banks to continue or accelerate their rate-cutting cycles. In Brazil, the approval of a key tax reform prompted an S&P upgrade to the country’s long-term ratings, from BB- to BB. Mixed economic data out of China – where disinflation was more pronounced than expected – was met with various policy support measures.
Against the backdrop of falling government bond yields and improved risk appetite, EM debt and currencies had a strong month, rounding off a positive year for asset-class performance. In the local space, the JPM GBI-EM rose 3.2% in December (12.7% for 2023), with both bonds and FX contributing to returns. In the hard currency market, the JPM EMBI BD rose 4.7% in December, taking 2023 returns to 11.1%, while in the corporate market, the JPM CEMBI rose 3.1% in December (9.1% for 2023).