Emerging market (EM) fixed income continued to show its resilience in June, as reflected in positive returns across the asset class.

In the US, Treasury yields retreated as several members of the Federal Open Markets Committee (FOMC) adopted a more dovish tone – suggesting they would support an interest rate cut as early as July if inflation were to remain subdued, with downside risks to the labour market building. However, this appears to remain a minority view – US Federal Reserve chair Powell continued to reiterate a 'wait and see' approach as tariff-related inflation is still expected to emerge over the summer. Nonetheless, by month-end, markets were pricing in around 65bps of rate cuts by the end of this year, with a September rate cut seen as increasingly likely.

Turning to emerging markets, the local debt market (JPMorgan GBI-EM GD) returned 2.8% in US dollar terms, taking year-to-date returns to 12.3%. This was led by EM currencies, notably in Latin America and Eastern Europe, with currencies boosted by the broader weakness in the US dollar. Local rates markets also made gains, helped by markets such as Brazil and Turkey.

In the hard currency space, the sovereign market (JPMorgan EMBI GD) rose 2.4%, with the high-yield segment (2.8%) outperforming investment-grade debt (2.0%), as credit spreads tightened in the former on improved appetite for risk. This took year-to-date returns to 5.6%. African and Latin American markets led index returns, with Ecuador and Angola both at the top of the index.

In the corporate market, the JPMorgan CEMBI BD returned 1.4%, with high-yield and investment-grade both contributing to this. Year-to-date returns are now at 4.0%.

Current top-down positioning

For illustrative purposes only. For further information on the investment process, please see the important information section.

From a top-down risk perspective, we have kept our overall risk target at an overweight stance. While our top-down EM FX positioning has remained the same at a small overweight, we have moved to a neutral position in EM rates (from overweight) and increased exposure in EM hard currency to a small overweight (from neutral).

Regarding EM FX, our positive view reflects the fact that EM monetary policy remains tight relative to inflation, the growth outlook has improved, and we expect flows into the asset class to continue to rise as market participants reduce their exposure to US dollar assets. In EM hard currency debt, we remain constructive given the more balanced global growth outlook since April; we favour markets with supportive fundamentals and high carry (yield) to cushion against potential volatility. Our move to neutral top-down positioning in EM rates reflects the balanced growth outlook, which – combined with recent higher-than-expected inflation prints – may reduce the total number of potential rate cuts by EM central banks. We have taken profits on select positions in Asia and CEE and favour markets where real (inflation-adjusted) yields remain high (in Latin America and select CEE markets) or where the growth outlook remains challenging (Asia).

Outlook

Global economic uncertainty remains elevated, with trade policy still in the spotlight. While many of President Trump’s proposed tariffs are paused at the time of writing, they remain a key area of focus for markets. That said, overall volatility and market sensitivity to tariff-related headlines have reduced in recent weeks. In the meantime, there has been a renewed focus on public deficits and financing – concern around these is evidenced by a steepening of developed market bond yield curves (yields on longer-dated debt have risen). In contrast, EM yield curves have remained broadly immune to these global shifts, and central banks in major markets such as South Africa and Mexico continue to cut rates. Recent US dollar weakness and EM FX resilience continue to support the EM debt asset class.

While trade tariffs may introduce short-term pressure on US inflation and impact global growth, the initial recession risk fears that emanated from Liberation Day have receded, given signs of greater flexibility from the US administration. The global growth and inflation outlook remains uncertain, however, EM economies continue to be in a good place from a monetary-policy-outlook perspective. Many EM central banks delayed their rate-cutting cycles through 2024, and softening inflation across many EM economies has resulted in elevated real (inflation-adjusted) yields, which remain a key driver of long-term returns for the EM local rates market. The resilience of EM FX will also give comfort to EM central banks in their rate-cutting cycles. All of this is helpful for the asset class in the context of mounting global economic uncertainty.

Angola's economy showed resilience in the first quarter, with GDP growth rising to 3.5% year-on-year. The country benefited significantly from higher oil prices, which boosted fiscal revenues. As a result, the government appears to have postponed its engagement with the IMF.

In Nigeria, Moody’s upgraded the sovereign credit rating to B3 at the end of May, reflecting improvements in fiscal and external balances, as well as the positive impact of foreign exchange reforms. Oil exports performed strongly, contributing to a solid trade balance in Q1, helping the naira. Efforts to combat corruption also gained traction, with the arrest of a former CFO of the national oil company.

Sentiment towards Senegal’s debt weakened, dampening hard currency bond prices. Although the Q1 fiscal deficit of 1.7% of GDP aligns with the 2025 target of 7%, the supplementary budget for 2025 announced in June increases this to 7.8%. In addition, ongoing delays in resolving a debt misreporting issue continue to hamper progress on a new IMF programme.

Egypt reported a primary fiscal deficit of 1.5% of GDP, in line with the annual fiscal target. The government successfully issued a US$1 billion sukuk in a private placement to Kuwait. Additionally, remittance inflows remained robust, offering further support to the external accounts.

Ghana posted impressive economic growth in Q1, with GDP growing by 5.3% year-on-year, up from 3.4% in the previous quarter. The country’s credit rating improved following a Fitch upgrade to B- with a stable outlook. Meanwhile, the Ministry of Finance announced plans to reopen the local bond market in Q4 2025, marking a positive shift after its closure since 2022.

Côte d’Ivoire passed the IMF’s fourth programme review, securing a US$760 million disbursement and affirming the country's commitment to fiscal and structural reforms under the programme.

Zambia reached a staff-level agreement with the IMF, paving the way for further disbursements soon. Fuel prices were cut by 8% in a move aimed at easing inflationary pressures. Market performance was strong, supported by higher copper prices and rising production, which have underpinned the local currency and hard currency debt instruments.

Economic indicators presented a mixed picture in China. Retail sales in May exceeded expectations, supported by a trade-in programme and a shopping festival. Export performance was also strong, contributing to a sizable trade surplus; while exports to the US declined, shipments to the rest of the world increased. Inflation remained contained, with CPI and PPI readings aligning with consensus expectations. Meanwhile, trade talks with the US resumed and a trade agreement was announced, but market participants await further details. China’s yield curve bull steepened slightly, aided by flush liquidity. The renminbi outperformed the US dollar as the currency fixings were moved lower.

The Reserve Bank of India delivered a surprise interest rate cut along with a reduction in the reserve requirement ratio (RRR). However, it unexpectedly shifted its policy stance from "accommodative" to "neutral" after only one meeting, sending conflicting signals. As markets focused more on the change in stance than the rate cut, local bond yields rose. Elsewhere, manufacturing PMI eased slightly but stayed well in expansion territory. Inflation was lower than expected, primarily due to lower vegetable prices, and FX reserves remained robust at around US$700 billion.

The presidential election in South Korea concluded as expected, with a win by opposition leader Lee Jae-myung. Following this, the local currency yield curve bear steepened (longer-dated bond yields rose more than shorter-dated bonds), as the new president is expected to adopt a more fiscally expansive policy. Further upward pressure on yields came from the recently announced supplementary budget, which is expected to increase bond supply later in the year. Trade data was strong, led by AI-related exports of semiconductors and equipment, with preliminary export data for June exceeding forecasts. First-quarter GDP was also stronger than expected.

Thailand's political landscape became more precarious after a key coalition partner (BJT) withdrew from the ruling alliance, reducing the government's majority and raising the risk of the prime minister's removal due to a leaked phone call controversy. These political developments weighed on the baht, although the rise in the gold price helped the currency to recover against the US dollar. The Bank of Thailand held rates at 1.75% in a split decision, which triggered a slight sell-off in the bond market.

Taiwan saw a surge in exports in May, driven primarily by continued structural demand for semiconductors, with a 38% year-on-year increase far exceeding the 20% forecast. Industrial production also outperformed, rising 22.6% against expectations of 18%. The Taiwan dollar had another strong month, supported by a combination of significant equity inflows and the continued unwind of US dollar positions built up onshore.

Bank Indonesia held rates steady while maintaining a dovish tone. This, together with encouraging macroeconomic data, resulted in a bull steepening of the yield curve. Continued foreign inflows into local bonds also contributed to a fall in yields during the period.

Inflationary pressures moderated in Malaysia, with May's inflation print coming in slightly below forecasts, easing concerns ahead of the central bank's review. The government is set to implement a sales tax on high-end consumer goods starting on 1 July, with the aim of boosting government revenue.

In the Philippines, the central bank cut its policy rate by 25bps to 5.25%, signalling a continued dovish stance. The central bank also revised its inflation target range down to 2%–3% (from 2%–4%), while simultaneously downgrading its growth forecast. On the fiscal policy front, policymakers signalled a more expansionary stance, with a wider deficit over the next few years.

Argentina presented mixed macro data over the period. Despite some relatively positive fiscal numbers, the current account significantly underperformed due to a surge in goods imports and high levels of tourism spending abroad. The government issued local bonds to build up reserves. There was continued improvement in inflation, which dropped below 2% month-on-month for the first time since 2020, supporting the currency and local bond performance. Politically, the Supreme Court upheld a decision barring former President Cristina Fernández de Kirchner from holding public office, which the market welcomed.

Brazil’s data was softer overall, with April industrial production contracting year-on-year. In addition, PMI data moved back below 50 (into contractionary territory), signalling subdued economic momentum. A notable fiscal development was the unanticipated congressional repeal of the recently announced financial transactions tax (IOF tax), which complicates the government's path to meeting its fiscal targets. The central bank surprised the market with a 25bps rate hike to 15%, although it announced this is likely to mark the end of the hiking cycle. This, alongside a weaker US dollar, supported the Brazilian real.

In Colombia, the government suspended the fiscal rule for three years after releasing a medium-term framework projecting a larger 2025 deficit of 7.1% of GDP. These fiscal developments prompted downgrades by two rating agencies to Baa3 and BB, the latter with a negative outlook. The decision to shift towards issuing short-dated debt due to a steep yield curve boosted the performance of longer-dated bonds (given lower supply), despite the deteriorating fiscal outlook. President Petro’s labour reform was passed by Congress and the Senate; it is expected to raise employment costs, adding to the complex policy backdrop. Security concerns also rose following the shooting of a political candidate at a campaign rally. This raises concerns for further incidents as elections are scheduled for next year.

In Peru, inflation printed lower than expected at around 1.7% year-on-year, and the central bank maintained its policy rate at 4.5%. Discussions around a potential new pension fund withdrawal were delayed, improving investor sentiment. In addition, the government conducted a debt management exercise - buying back shorter-dated bonds while issuing longer-dated debt; this provided some relief for investors who had been awaiting this for a long time, and helped the local bond market.

Economic activity in Chile was stronger than expected for April, but inflation remains above the central bank’s target. The bank opted to hold rates steady, with forward guidance indicating potential rate cuts at upcoming meetings. However, policymakers remain cautious given geopolitical risks, notably tensions in the Middle East.

Mexico's central bank cut the policy rate by 50bps and signalled a pivot toward a more data-dependent stance. Retail sales showed signs of weakness, though broader economic activity held steady. On the political front, the Supreme Court elections were completed, with all nine new judges aligned with the ruling party, however, there was a limited market reaction

Ecuador advanced several key fiscal measures, including cuts to diesel subsidies. These measures followed the successful upwards revision of the IMF programme by US$1 billion, supporting the strong performance of Ecuador's hard currency bonds.

In the Caribbean, Barbados and the Bahamas accessed capital markets with new bond issues, despite being infrequent issuers. The bonds were well subscribed, a sign of investor appetite for smaller, less liquid deals.

In Turkey, funding costs fell by approximately 3% following open market operations carried out by the central bank (whereby the bank buys domestic bonds to increase liquidity). The central bank maintained a broadly neutral tone, and is expected to resume rate cuts in July, contingent on a supportive global macro backdrop, further domestic disinflation and stability in the lira. This helped local bond yields to fall. On the political front, the deferral of a high-profile court case targeting the opposition reduced the immediate event risk, though the political climate remains tense.

The local bond yield curve in South Africa bull flattened over June, with longer-dated bond yields falling by more than shorter-dated yields. This was driven by expectations that the central bank would reduce its inflation target, which prompted the fall in yields across the middle and back-end of the curve. Markets are now pricing in a 25bps rate cut in July. While political uncertainty rose again after President Ramaphosa dismissed a Democratic Alliance member from his cabinet, tensions between the two largest coalition parties showed some signs of easing towards month-end.

In the Middle East, June was marked by heightened geopolitical tensions as Israel and Iran exchanged military strikes, with the US joining at one point. This led to high volatility in oil prices, peaking above US$78 per barrel before settling at around US$68. Despite the regional instability, markets showed resilience; notably, the Israeli shekel rallied as the currency’s risk premium continued to unwind.

In Ukraine, the market’s focus remained centred around the likelihood of protracted conflict. However, sentiment improved slightly towards month-end amid renewed speculation around a potential ceasefire.

Inflation in Czechia remains stubbornly higher than the target, with limited signs of easing, causing the central bank to express concern. Despite this, the domestic economy is proving resilient, particularly supported by solid consumer activity. On the political front, tensions are rising ahead of upcoming elections. Prime Ministerial frontrunner Andrej Babiš is once again facing legal scrutiny over corruption allegations, which could heighten political uncertainty.

Hungary continues to lag its regional peers in terms of economic performance, with data confirming it as the weakest growth story in Central and Eastern Europe. While household consumption has shown some resilience, overall momentum remains subdued. The government’s price cap policies are contributing to a decline in headline inflation; however, the central bank remains firmly focused on underlying inflation dynamics and maintains a distinctly hawkish policy stance.

Poland’s inflation outlook appears favourable, with headline CPI approaching the central bank's 2.5% target. Nonetheless, the central bank governor surprised the market by alternating between a hawkish tone in June, and a dovish shift in July, resulting in volatility in the local bond market.

Romania formed a new government with a strong majority, which has enabled the announcement of a fiscal consolidation package allegedly targeting a 7.5% fiscal deficit for 2025. While implementation risks remain elevated, the reform package is viewed as a positive development overall. On the monetary policy side, elevated inflation and increased FX volatility are likely to see rates kept on hold for an extended period.

The EM corporate debt market (JP Morgan CEMBI BD) gained 1.4% over June, with the high-yield and investment-grade parts of the market boosting overall index returns. Both markets benefited from the fall in US Treasury yields over the month, while credit spreads were broadly unchanged in the investment-grade segment but tightened in the high-yield market. All sectors added to index returns, led by pulp & paper and metals & mining, while country returns were led by issuers in Africa and Latin America.