Emerging Market Debt Indicator September 2023
In the latest edition, the EM Debt team provides an update across the investment universe and shares the latest outlook and current top-down positioning.
Chapters
01
Market background02
Top-down views and outlook03
Africa04
Asia05
Latin America06
Central and Eastern Europe, Middle East and South Africa07
EM corporate highlights01
Market background
A shift in US interest-rate expectations resulted in a mixed month for EM fixed income markets. EM FX came under pressure from the strong US dollar given the sharp rise in US Treasury yields, but EM high-yield debt markets benefited from a tightening of credit spreads.
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.
