Against the backdrop of renewed geopolitical tensions between the US and Iran, highly volatile, elevated oil prices, and rising global sovereign bond yields, emerging market (EM) fixed income performance was mixed overall.

July saw US Treasury yields rise sharply as a renewed flare-up in the US-Iran conflict drove oil prices higher and reignited fears of persistent inflation. In addition, at its late-July meeting, the Federal Open Market Committee (FOMC) held rates at 3.50%-3.75%, but in a hawkish move, three members dissented in favour of a 25bps hike, and Chair Warsh declined to rule out further tightening. Furthermore, the FOMC meeting created some confusion for markets as Warsh leaned towards a preference for tightening policy through the Fed’s balance sheet rather than hike rates. The lack of clarity provided by Warsh over the path of policy from here and hawkish leaning of the Fed triggered a sharp steepening of the curve.

Within the EM fixed income asset class, the local currency debt market (JPMorgan GBI-EM GD) gained 0.3% in US dollar terms over the month, led by EM FX (0.5%) while local rates were slightly weaker (-0.2%). EM FX was supported by the weaker US dollar, as well as strong performance from the likes of the Colombian peso, which benefitted from a larger-than-expected interest rate hike on the last day of June. Local bonds were slightly weaker due to the global rise in developed market bond yields. The hard currency sovereign debt market (JPMorgan EMBI GD) fell 1.4% in July, predominantly driven by the rise in US Treasury yields, since spreads widened only modestly at the index level. The high-yield segment (-0.9%) outperformed investment-grade (-2.0%), as the latter was impacted more by the rise in US Treasury yields given its higher duration.

Current top-down positioning

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Outlook

Emerging market debt has demonstrated notable resilience against a volatile backdrop so far in 2026. Risk assets have continued to recover, and investor sentiment has improved, supported by broadening and resilient growth and continued EM inflows. Geopolitical tensions in the Middle East remain unresolved and elevated oil prices remain the key risk to the market backdrop, alongside the durability of the geopolitical risk premium in refined product markets. Inflation across emerging and developed markets has surprised positively, with EM fundamentals remaining sound. That said, any renewed oil price pressure is unlikely to be fully transitory, and uncertainty around the Fed’s future policy path is a key risk to the backdrop.

Meanwhile, ongoing volatility in developed market (DM) bond markets – where a sharp bear steepening of yield curves reflects increased fiscal and inflation concerns – continues to challenge their traditional safe-haven status, reinforcing the diversification case for EM debt.

Our structural view on EM remains constructive, and we have increased our top-down risk target. This has been driven by increasing our EM FX overweight, while we have moved to neutral in hard currency debt and maintain a neutral local rates position.

The increase in our EM FX overweight is supported by a broadening of global growth surprises, improving risk appetite and better global liquidity. EM FX remains underpinned by relatively high real rates, with technicals supportive as positioning is very light, while performance is increasingly being driven by fundamentals. We have funded this long position largely from the US dollar, rotating out of our short euro position as market positioning is now more supportive for the euro and yen over the US dollar.

We remain neutral in EM local currency debt as compelling real yields are offset by our expectation that the rate cutting cycle priced in at the start of the year is unlikely to fully come through. That said, inflation prints are coming in better than expected, which is supportive for global liquidity despite slightly more hawkish central banks. We continue to prefer country-specific opportunities where the risk/reward trade-off is attractive.

In hard currency debt, we have reduced our position to neutral, as we have concerns on the future policy path of the Fed and the potential implications for the long end of the US Treasury curve, despite EM spreads remaining resilient. We continue to favour selective high-carry and country-specific opportunities, while remaining mindful of divergence between commodity exporters and oil importers.

Inflation in Egypt was lower-than-expected, slowing to 14.3% year-on-year in June, with prices falling on a month-on-month basis (deflation). The central bank kept interest rates on hold at its latest meeting, citing elevated geopolitical risks. Net FX reserves continued to rise, reaching a record US$55.1bn at the end of June. Egypt successfully issued JPY80bn sustainability-linked Samurai bonds, as it seeks to diversify its funding sources. External support remained a key pillar, with the EU disbursing EUR1.5bn under its financial assistance package, while the IMF completed reviews of the Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF), unlocking a US$1.8bn disbursement.

In Ghana, inflation accelerated to 5.3% in June, up from 3.7% in May, largely reflecting base effects and some pass-through from oil prices. The central bank kept its policy rate at 14%, judging the inflation outlook as broadly unchanged. The current account surplus widened to 3.8% of GDP in H1, up from 3.6% a year earlier, driven by the trade account as gold and oil exports rose strongly, while the financial account posted a deficit. External support continued, with Ghana settling a US$700mn Eurobond payment and the IMF completing the final review of the Extended Credit Facility (ECF), releasing a US$371mn disbursement and approving a new 36-month non-financial programme.

Senegal formally began the process of hiring a financial advisor on debt matters, with media reports suggesting Lazard had been appointed. The Ministry of Finance reiterated that no sovereign debt restructuring is planned, as discussions with the IMF continue. On the political front, President Faye launched a new party, formalising his split with former Prime Minister Sonko, and won a constitutional challenge against reforms that had sought to curb presidential powers.

Zambia's inflation held steady at 6.5% year-on-year in July, remaining within the central bank’s target band. Fiscal data was robust, with the tax-to-GDP ratio for 2025 rising to 22.1% on stronger domestic revenue collection. The trade surplus widened to US$4.2bn in June as exports rose 37% year-on-year, led by higher copper output and prices, while imports fell by 5.6%.

In Nigeria, the central bank held rates at 26.5%, as expected, citing uncertainty around the conflict in the Middle East and persistent inflationary pressures. Inflation came in below investor expectations but remained sticky at 15.9% year-on-year. The government confirmed it had accessed US$1.5bn of the US$5bn Total Return Swap facility with First Abu Dhabi Bank, providing support for the budget and enabling the refinancing of existing debt.

Angola concluded its first debt-for-education swap with the World Bank, refinancing EUR340mn of external debt, with disbursements expected in August. The government also raised US$321mn through the privatisation of a 15% stake in Unitel, which was 1.2x oversubscribed. Inflation continued to ease, slowing to 10.1% year-on-year in June, prompting the central bank to cut rates by 125bps to 15.75% on the improving inflation outlook. Meanwhile, the trade surplus narrowed year-on-year as imports rose, while oil exports came under pressure.

In Kenya, inflation edged up to 6.5% year-on-year in July on higher food and transport costs, while Q1 GDP growth surprised to the upside at 5.3%, supported by tourism and construction. The government cut VAT on fuel for three months to ease pump price pressures, and rebalanced its financing plan for fiscal year 26/27, cutting the domestic borrowing target and raising the external target to diversify funding sources. The World Bank cut its growth forecast for Kenya and flagged fiscal consolidation as a key watchpoint, even as Fitch affirmed its B- rating with a stable outlook.

Côte d'Ivoire’s Q1 GDP expanded by 4.7% year-on-year, while inflation rose to 1.8% year-on-year in June, with core inflation remaining stable. Positive developments included phase 3 of the Baleine oil and gas field project advancing, while the government signed five agreements worth US$875mn with the World Bank.

In Uganda, inflation rose to 4% in July, driven by higher food and utility prices, though it remains low in absolute terms, with core inflation unchanged. In the Republic of Congo, S&P maintained its CCC+ rating with a stable outlook, citing elevated debt-to-GDP and weak public financial management, while affirming the Democratic Republic of the Congo at B- with a positive outlook, on expectations of continued reserve accumulation supported by stronger cobalt and copper exports.

Inflation data in China again reflected soft domestic demand, with core CPI coming in slightly below expectations while PPI printed in line. External trade remained strong: the trade balance printed at US$125bn, with export growth higher than expected at 27% year-on-year, and imports also beating expectations at 36% year-on-year. Activity data was more mixed: Q2 GDP came in at 4.3% year-on-year, below both consensus and the Q1 print, while June retail sales beat expectations, though consumer spending remained subdued overall. The manufacturing PMI slipped back into contractionary territory at 49.2, down from 50.3 and below the 50.1 expected. However, industrial production was higher than expected. On the policy front, the PBoC's Q2 meeting retained an "appropriately accommodative" stance but adopted a neutral tone, emphasising policy precision over active easing, and placing greater weight on the quality of growth – language that suggests the central bank is prepared to be patient on near-term rate cuts.

In India, the central bank intervened in the FX market, selling US dollars to support the rupee. Following the government’s introduction of FX measures last month to attract inflows and stabilise the currency, cumulative inflows reached more than US$30bn by the end of July. Inflation for June exceeded expectations at 4.4%, though it remains within the RBI's target range. The trade deficit widened to US$30.4bn, with exports weaker on the month, while imports strengthened. Industrial production accelerated to 7.3% year-on-year in June.

Bank Indonesia held rates unchanged at 5.75%, a slight surprise to the market. However, the decision was interpreted as a dovish tilt after the central bank increased the FX hedging discount available to foreign investors, taking the view that this is a more effective tool than raising rates. Reserves rose 0.5% over the month, the first increase in six months. The Ministry of Finance indicated that the revised budget deficit for this year is likely to come in higher at 2.8%, an outcome that was anticipated given the scale of energy subsidies. Separately, the central bank governor resigned unexpectedly, with the senior deputy governor temporarily taking charge. In a positive development, S&P maintained its stable outlook, against expectations for a move to negative.

The Bank of Korea raised rates by 25bps, as expected, and accompanied the decision with some hawkish commentary, declining to rule out a further hike at the next meeting. June inflation was in line with expectations, with food and energy prices higher, while the core measure was softer. Exports remained very strong, growing 71% year-on-year in June, with the trade balance now at US$36bn. Q2 GDP came in stronger than expected at 0.6% quarter-on-quarter. The currency rallied sharply over the month as investors reduced their hedge ratios (buying Korean won and selling US dollars) after the KOSPI, South Korea’s main equity index, fell steeply.

Headline inflation in the Philippines came in slightly below expectations, though core inflation moved higher. Commentary from the central bank governor struck a hawkish tone, stating that policy would be directed at bringing inflation down to 3%. The unemployment rate for May was slightly higher at 4.8%. Remittances grew 2% year-on-year in May, marginally below expectations, while the trade balance was slightly better than expected, driven by strong exports.

Headline inflation in Thailand was slightly below expectations at 2.4%, and while core printed slightly higher at 1.2%, it remains within the central bank's target range. Exports rose 20.8% year-on-year in June, above expectations. However, the current account remained in deficit in June, extending a run of deficits driven largely by higher oil prices, given Thailand’s status as a net oil importer.

In Malaysia, state elections were held in Johor and Negeri Sembilan, with setbacks for the incumbent party seen as a signpost for the general election. The central bank left the policy rate on hold at 2.75%, as expected. Q2 GDP beat estimates at 5.8%, while industrial production remained strong in absolute terms, although it came in below expectations. The trade balance was weaker than anticipated, with a surplus of MYR 15bn against expectations of MYR 43bn. Exports slightly missed expectations but were nonetheless strong at 45.4% year-on-year, driven by electronics and LNG, while imports grew 44% year-on-year versus 24% expected.

The Monetary Authority of Singapore’s meeting delivered a surprise slight increase in the rate of appreciation of the policy band. CPI rose 1.9% year-on-year in June, below expectations, while Q2 GDP beat expectations at 5.7% year-on-year, driven by tech-related manufacturing. Growth was also very strong in Taiwan, where Q2 GDP grew at 12.9% year-on-year, above expectations.

Argentina's disinflation trend continued, with the monthly CPI print slowing to a 10-month low of 1.9%, while core also eased, despite annual CPI rising to 33.5% year-on-year. Economic activity, however, slowed on weak domestic demand. The external accounts remain strong: the 12-month rolling trade surplus reached 3.3% of GDP as exports rose 25% year-on-year, led by agriculture and oil. The government's 2026/27 financing plan ruled out a return to the Eurobond market, instead securing US$3.2bn in bank loans from international banks. Moody's upgraded the sovereign to B3 from Caa1 with a positive outlook, citing scope for further improvement from macro stabilisation, structural external gains and reserve accumulation, which should ease external, liquidity and fiscal pressures.

The inflation picture in Brazil was more nuanced. Inflation eased to 4.4% year-on-year in July, driven by falling food prices. The central bank raised its 2026 inflation forecast to 5.2%, citing El Niño and demand-side pressures, and expects it to remain above the target band throughout the year. Industrial activity remained in contractionary territory for the third consecutive month. The current account deficit narrowed in line with consensus on a wider trade surplus and higher foreign direct investment, but fiscal data disappointed as the primary deficit widened by more than expected. The government is seeking authorisation for US$35bn of annual bond issuance, a marked step up from around US$10bn currently. On the political front, the polls continue to show Lula leading against Flavio Bolsonaro.

In Colombia, the central bank held rates at 12% against expectations of a 50bps hike, in a 3-4 split decision. This was despite inflation remaining high and continuing to rise, with headline at 6.1% year-on-year in June and core marginally better than expected at 6%. However, the peso had another strong month, helped by carry and positive sentiment regarding the incoming administration. Retail sales growth slowed to 11.7% year-on-year in May, while broader economic activity accelerated, driven largely by government consumption. The trade deficit narrowed as oil and gold exports rose 19% year-on-year on higher prices. The Ministry of Finance proposed a 2027 budget worth 27% of GDP, leaning more on domestic financing alongside tax reforms. The Senate elected the Democratic Centre's Honorio Henríquez as its president over Abelardo's pick, potentially making it harder to pass reforms that would put the economy on more sustainable footing.

In Chile, the central bank held rates at 4.5% in a unanimous decision but turned more cautious, citing renewed uncertainty around the Middle East conflict and the volatile oil price. That caution was echoed in inflation data – which printed above expectations at 4.3% year-on-year, driven by food and transport – and subsequently weighed on the local bonds. The Ministry of Finance announced it will cut fuel taxes via the price stabilisation mechanism to alleviate gas price increases. The trade balance remains strong, with the June surplus beating expectations and taking the 12-month trailing surplus to almost 8% of GDP. The government updated the borrowing plan to include an additional US$5.2bn of Eurobond issuance for this year, before successfully placing EUR3bn across three tranches.

In Mexico, CPI inflation slowed to 3.1% year-on-year in July, from the 3.4% in June. This deceleration puts CPI inflation at its lowest level since 2020, approaching the central bank’s 3.0% target. The deceleration was driven by non-core items. Fiscal pressures linger, with the public sector deficit up 36% year-on-year in the first half of the year. Industrial production was weak and below expectations, while the trade surplus rose to US$4bn, ahead of expectations, as exports were up 35% year-on-year. This helped the Mexican peso to strengthen, with a strong preliminary Q2 GDP print showing a rebound from the contraction in Q1.

The central bank in Peru held rates at 4.25% as expected, with inflation remaining elevated. Growth weakened considerably, with activity falling to 1.8% year-on-year in May against consensus of 3.1%, largely on El Niño effects. Politically, the Electoral Commission formally confirmed Fujimori as president, with Julio Velarde confirmed to remain as central bank governor, which the market took positively. The Constitutional Court ruled that Congress cannot independently pass laws to raise public spending, helping the government to maintain fiscal discipline.

In Ecuador, CPI accelerated to 1.65% year-on-year in June, although it remains benign. The World Bank approved a US$750mn loan backing President Noboa's fiscal reform programme, which it estimates could create 180,000 jobs by 2031. However, political risks are rising as courts suspended a main opposition party from running in the November local elections over funding irregularities.

In the Dominican Republic, CPI inflation slowed to 5.5% year-on-year in July from 5.7% in June – the first deceleration after four months of acceleration – though it remained above the upper limit of the central bank's target band. Activity was strong, rising to 6.4% year-on-year in June. The central bank held rates at 5.3% in July, reflecting both the stronger growth and higher inflation.

The South African Reserve Bank (SARB) left interest rates unchanged at 7.0%, against the market’s expectations of a 25bps hike after June’s annual inflation rose to 5.0% (with core inflation also rising to 4.1%). The Monetary Policy Committee (MPC) was split, with two members voting in favour of a hike. The SARB lowered its short-term inflation forecasts, but still expects inflation to stay above 4% into early next year, well above its 3% target. This weighed on the rand and prompted a sell-off in longerdated domestic bonds. Separately, mining production fell 5.4% year-on-year, missing expectations, while the trade surplus widened to ZAR17.8bn in June, ahead of forecasts.

In Turkey, inflation eased slightly to 32.1% year-on-year in June, helped by lower energy prices, though monthly core inflation remained firm. The central bank left its monetary policy stance unchanged, citing uncertainty over oil prices and inflation risks. The current account deteriorated by more than expected, and the manufacturing PMI remained in contraction. On the fiscal side, the government announced plans to phase out the fuel tax sliding scale, easing the burden on the budget.

In Ukraine, drone attacks from both sides have intensified, impairing Russian oil exports and Ukrainian food exports. On the political front, President Zelensky reshuffled the government, replacing the prime minister and the cabinet, including the popular defence minister. This triggered protests, which led to the commander-in-chief’s replacement in an attempt to defuse the situation.

Kazakhstan's oil production has been impacted by ongoing drone strikes on tankers at its main Black Sea export terminal. Regarding inflation, June data edged down to 10.3% year-on-year. Against expectations of a hold, the central bank cut rates by 25bps, extending its easing cycle. The move was likely driven by the upcoming elections, though the accompanying statement flagged lingering inflation concerns.

Across the Middle East, tensions between the US and Iran have escalated again and, while discussions are ongoing, the Strait of Hormuz remains closed and oil prices remain elevated as a result.

Turning to Central and Eastern Europe, in Czechia, inflation eased to 1.5% year-on-year, below an expected 1.8%, driven by lower food and fuel prices. Q2 GDP growth was marginally below expectations, though the recovery remains underway, and the PMI printed above expectations at 54. Retail sales were strong and industrial production rose 2% year-on-year, although the current account deficit for May was worse than expected.

Poland saw marginal upside surprises across industrial production, retail sales and construction output, while PPI slowed to 1.7% year-on-year in June. The central bank left rates unchanged at 3.75%, as expected, adopting a more balanced tone amid heightened geopolitical uncertainty. May’s current account deficit was better than expected at 0.9% of GDP, driven by softer imports. The Ministry of Finance confirmed it had covered 63% of gross financing needs for the year by end-June; the government is considering raising personal tax thresholds, an early signal of pre-election fiscal pressure.

In Hungary, inflation slowed to 1.7% year-on-year versus an expected 1.8%. The central bank cut rates by 25bps to 5.75%, maintaining a dovish tone on the back of the improving inflation outlook. Q2 GDP surprised marginally to the downside but remained stable at 1.7% year-on-year. Industrial production was strong at 5.4% versus an expected 1.8%, while retail sales were in line with expectations. Meanwhile, the trade surplus beat forecasts in June.

Romania's political crisis remains in focus, with no progress on forming a government. Securing European funds ahead of the end-August deadline remains the priority, with parliament having approved four of the six remaining laws required to unlock them. CPI eased below expectations to 10.4%, though PPI rose to 12.1%, driven by fuel prices. The central bank left rates unchanged at 6.5%, as expected, in a unanimous decision reflecting elevated inflation expectations. The 12-month rolling current account balance narrowed to 7.3% of GDP, and budget data was strong, with the H1 deficit narrowing to 2% of GDP from 3.7% a year earlier. On credit ratings, Fitch retained Romania's investment-grade rating (BBB- with a negative outlook), though only after a government appeal and the submission of additional information to Fitch.

The EM corporate debt market (JPMorgan CEMBI BD) returned -0.5% in July. Similar to the sovereign market, the investment-grade portion of the market lagged (-0.8%) while high-yield was flat (0.0%). This was again driven by the rise in US Treasury yields, with the higher-duration investment-grade segment more sensitive to the moves. Spreads were broadly stable in both segments over the month.