Chapters
Market background
A combination of factors prompted a shift in expectations around US interest-rate cuts, resulting in a diverse range of returns in fixed income markets.
At the very start of the year, markets were pricing in around 150 basis points (bps) of cuts by the US Federal Reserve (Fed) over the course of 2024, but higher-than-expected inflation and surprisingly strong jobs data prompted a revision of this. Furthermore, minutes from the Fed’s January meeting showed that most of its members thought moving too quickly to cut rates carried a bigger risk than keeping policy tighter for longer. US Treasury yields rose and the US dollar strengthened, and by the end of February, only 85bps of cuts were priced in by the market.
Against this backdrop, EM debt had a mixed month. The local bond index (JP Morgan GBI-EM) fell by 0.6%, driven by EM FX (local bond returns were marginally positive). EM FX came under pressure from the strong US dollar given the sharp rise in US Treasury yields over February. In the sovereign hard currency market, the JP Morgan EMBI gained +1.0%, led by the high-yield segment (+2.6%), while the investment-grade segment returned -0.6%. Turning to corporate debt, it was another positive month, with the JP Morgan CEMBI returning +0.7%. A continued tightening of credit spreads, reflecting the increasing likelihood of a soft landing for the US economy, helped this market - especially the high-yield segment.
