Yields across government bond markets generally fell in November, despite heightened market volatility early in the month relating to Donald Trump’s US presidential election victory. Although Trump’s treasury secretary nomination injected some calm into fixed income markets, a robust US economic growth print and rise in monthly inflation led to expectations of a slower pace of monetary policy loosening in the US.

Against this backdrop, performance in emerging market (EM) fixed income was mixed. On the local currency side, the JP Morgan GBI-EM GD fell by 0.6%; although hedged local currency bonds returned 0.9% over the month, the EM currency market fell 1.4% - reflecting pressure from a stronger US dollar and the expectation that US interest rates will remain relatively high. The Brazilian real was among the worst performing currencies, after the country’s long-awaited budget-cut announcements disappointed markets. In contrast, it was another strong month for the Nigerian naira.

Turning to the hard currency market, the JP Morgan EMBI GD index ended the month up 1.2%, primarily driven by high-yield market returns, although investment-grade markets also posted gains. High-yield markets that continued their strong run included Argentina and Sri Lanka, with the former boosted by a sustained strong fiscal surplus, and the latter benefiting from discussions progressing between the newly elected administration and the IMF on the country’s debt restructuring.

Top-down positioning at the end of November 2024

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

From a top-down perspective, we have reduced our overall beta targets to neutral, however, we retain bottom-up relative-value risk and remain positive on the asset class overall. We are neutrally positioned in local rates, slightly underweight in EMFX and modestly overweight hard currency bonds.

While the US election result may pose risks to the inflation outlook, we remain constructive on local rates on a longer-term basis: a broad softening of inflation across EM economies means that real (inflation-adjusted) yields remain attractive, which is a key driver of long-term returns. Rate-cutting cycles have further room to go, and the overall trajectory of Fed policy gives us increased confidence that EM economies have the ability to continue cutting rates. Regarding EM FX, the Trump win poses risks from tariffs, as well as higher US Treasury yields, both of which may hurt EM FX; we are underweight as a result.

In EM hard currency, our top-down target remains overweight as the recent front-loading of interest rate cuts by the Fed should be supportive for higher-yielding EM bond markets in the short term, and we remain constructive on idiosyncratic countries with yield-cushion expected to weather potential election-related volatility.

Outlook

Continued strong US economic and labour-market data, combined with ongoing cautious commentary from Fed Chair Powell and expectations of reflationary policies under Trump, has continued to suppress the market’s expectations of rate cuts. The short-term reaction to the Republican win has seen market participants price key themes/outcomes related to Trump’s expected policy path: an anticipated rise (or return of) inflation, evidenced by higher US Treasury yields since the result; concerns around trade tariffs; and an expected shift in gear on the geopolitical front based on the view that Trump will try to expedite peace deals with the respective regimes. The reaction in emerging market assets to the rise in Treasury yields has been modest, which may be a reflection of Trump’s political behaviour in his first term (what he threatened differed significantly from his eventual policy), the market’s reduced risk ahead of the elections, as well as the macro backdrop of a US cutting cycle (vs. a hiking cycle in 2016), providing an anchor to broader risk.

While financial markets are likely to remain volatile, we maintain a positive medium-term outlook for returns of the EM debt asset class. Many EM economies have solid fundamental foundations, and the more fragile economies continue to receive plenty of support from the IMF and other multilaterals. EM bond market valuations look attractive – with some markets still pricing in significantly more risk than we believe is justified.

The fourth review of Egypt’s IMF programme is still pending. Delays are thought to relate to IMF concerns over the extent to which geopolitical risk has been factored into Egypt’s fiscal policy path. However, Egypt’s recently completed initial public offering (IPO) of a 30% stake in state-owned enterprise United Bank shows progress in driving private-sector growth, and it continues to attract regional investment, with a large Qatari real-estate investment project announced in November.

Kenya’s foreign exchange reserves continue to rise, which is positive for its external accounts. It secured a US$200 million loan from the African Development Bank (AfDB) and is currently in negotiation with the World Bank for a USD$750 million loan. The country’s local currency bonds have shown strong performance on the back of an improved fiscal position under the IMF programme, along with low inflation.

Inflation in Ghana accelerated to 22.1% year-on-year in October, driven by food prices; the central bank kept the policy rate unchanged at 27%. The IMF completed its third review of the Extended Credit Facility arrangement, triggering a release of US$360 million. Reserves remain strong, and the Q3 current account surplus was a healthy 2.6% of GDP. The forthcoming presidential election is not expected to result in significant policy change.

Results of parliamentary elections in Senegal were confirmed, with the current ruling Pastef party increasing its majority to 130 out of 165 seats, which should make it easier for President Faye to implement reforms. Key to watch will be the 2025 budget announcement in December. S&P kept the country’s credit rating at B+ but revised its outlook to negative from stable, driven by fiscal slippage this year.

In Nigeria, Q3 GDP growth print was higher than expected at 3.5% year on year. The central bank raised rates by 25bps to 27.5%, falling short of what market participants considered sufficient in light of rising inflation (currently at 34% year on year). The currency has been rallying since the new FX order management system went live, which should improve the functioning of the market. Additionally, US$2.2 billion of new issuance made in November was four times oversubscribed, indicating strong demand for this high-yield debt market. Fitch affirmed Nigeria’s credit rating at B- and kept the outlook as positive.

Inflation in Zambia rose to 16.5% year on year (up from 15.7%) in November, driven by higher food prices and currency depreciation. Responding to concerns around the kwacha’s weakness, the central bank raised policy rates by 20bps. Despite continuing problems relating to drought and electricity shortages, copper production remains strong, increasing 17.4% year on year in September.

Amid discussions around a potential IMF deal in Angola, the government stated that it is not looking to engage. Moody’s changed the country’s B3 rating outlook from positive to stable. Budget performance has been strong, with a surplus reported in each quarter this year, but the 2025 budget appears more expansionary, possibly as an election is planned for 2026.

Following Donald Trump’s election win in early November, Asian currencies came under pressure given the rising interest rate gap with the US and the broad strength of the US dollar. Relative to other regions – especially Europe – Asian currencies have held up okay, in part due to intervention to curb currencies from weakening too much. However, uncertainty around Trump’s potential tariffs is making market participants bearish on Asian currencies currently, which are likely to remain volatile.

In China, the stimulus measures announced in November broadly failed to meet the market’s hopes, with the US$1.4 trillion debt swap package aimed at stabilising government financing rather than significantly boosting growth. With external headwinds expected to intensify, the market will be expecting more policy support to be announced to aid growth in 2025. The Central Economic Work Conference (CEWC) in mid-December will be important to watch as 2025 growth targets will be discussed, although these targets are only going to be communicated in March 2025. Activity data releases in November were mixed; while retail sales and the various PMIs were stronger than expected, import growth, credit growth, fixed-asset investment and property data was all muted. Inflation remains subdued, with recent data lower than expected. The country’s trade surplus remains very large, reflected in both strong export volumes and weak import volumes. Given the backdrop of disappointing growth stimulus measures and benign inflation, local bonds yields fell over the month.

Third quarter GDP data in India was significantly lower than expected, at 5.4% year on year. However, higher frequency activity data since quarter end has been better, so a fourth quarter growth rebound is expected. The trade deficit was wider than expected. Food prices pushed monthly CPI inflation to a higher than expected, 6.2%, above the Reserve Bank of India’s upper target of 6%.

The Bank of Korea cut interest rates in a move that was unexpected based on its previous guidance. The bank also reduced its growth and inflation forecasts and turned more dovish overall. Combined with lower-than-expected inflation, this caused local bond yields to fall over the month. Exports and imports came in slightly weaker than expected, with export strength still largely concentrated in AI related sectors. The won performed well relative to other Asian currencies, as the central bank verbally intervened, while domestic companies were selling US dollars, which supported the currency.

Following the September presidential election in Sri Lanka, which Anura Kumara Dissanayake (AKD) won, parliamentary elections were held in November. AKD’s party, the National People’s Power, went from having just three seats in parliament to securing 159 out of 225. Since the result, the government has pressed ahead with the external debt restructuring, and has also reached a Staff Level Agreement with the IMF, which has helped the country’s hard currency bonds.

Bank Indonesia kept rates on hold, citing the pressure on the currency from higher US Treasury yields and the stronger US dollar. The third quarter current account balance was stronger than expected, but remained in a deficit.

GDP growth in Taiwan for the third quarter was better than expected at 4.2%, with the semiconductor sector continuing to perform well. Exports also rebounded following a weak September.

In Thailand, GDP data for the third quarter was better than expected at 3% versus 2.4% expected year-on-year.

The government in the Philippines announced a streamlining of tax treaties in a bid to attract investors into the government bonds.

Inflation in Singapore was well below expectations at 1.4%, driven by core items.

In Argentina, President Milei’s spending restraint continued to boost the fiscal surplus – now at 0.5% of GDP. Another attempt to overturn a presidential veto of legislation – this time relating to allowing the government to swap debt without congressional approval – failed, which was welcomed by markets.

In Brazil, long-awaited budget announcements materialised at the end of the month, but to the market’s disappointment, the focus was on tax cuts for lower-income brackets. While this policy intends to be revenue-neutral for the government (by increasing taxes for higher-income brackets) there are lingering concerns that Congress may pass the cuts but not the increases; it also signalled a lack of urgency from the administration in addressing the worsening fiscal situation. The central bank accelerated the pace of its interest rate hikes to 50bps following an upside surprise to inflation. The perceived increase in fiscal risk, alongside a higher probability of a faster pace of interest rate hikes, led to a large repricing in the local currency bond market and a depreciation in the currency.

In Chile, the comprehensive pension reform is making progress in Congress but had not yet been approved at the time of writing. If passed, the whole pension system would transition to target-date funds which could lead to a significant capital reallocation into local fixed-income assets. The finance minister announced budget cuts for 2025, citing concerns over the fiscal deviation in 2024. Trade data remains strong with a surplus exceeding 6% of GDP.

Political reforms in Mexico continued under Claudia Sheinbaum as Congress progressed a plan to dissolve multiple autonomous regulatory and oversight agencies and reassigning their work to existing government ministries. The budget announcement broadly met expectations, with a 2025 fiscal deficit target of 3.9% of GDP, but this relies on optimistic revenue assumptions. The budget included US$6 billion in support for state-owned energy firm Pemex which, alongside measures to simplify its tax framework, is seen as positive for the company. Inflation was weaker-than-expected, prompting the central bank to cut interest rates by 25bps along with dovish commentary. However, Moody’s shifted its credit rating outlook to negative, citing ongoing fiscal concerns.

Peru’s economy remains on a disinflationary path, with inflation in October again lower than expected. The central bank cut rates by 25bps to 5% but is likely to pause now that real rates are close to neutral. In further positive news, Q3 GDP data beat expectations, and Fitch revised its outlook to stable (from negative). However, the President of Peru’s fiscal council outlined concerns that the country may miss its fiscal targets next year.

Colombia announced budget cuts amounting to COP28 trillion (c.US$6 billion) for 2024, aiming to prevent the fiscal deficit from exceeding constitutional limits. This was well received by markets as it shows the government is respecting the fiscal rule. Fitch affirmed the country’s rating at BB+ with a stable outlook. Inflation printed lower-than-expected, but the central bank remains cautious about cutting interest rates at a faster pace.

Hard currency bonds in El Salvador outperformed on reports that a staff-level agreement with the IMF for a US$1.4 billion three-year programme was likely to materialise in December, which boosted investor confidence. Recent bond issuance attracted strong demand, and some proceeds were used to buy back the country’s front-end bonds, thereby extending its debt-maturity profile. As a result, Moody’s updated its credit rating to B3 (from Caa1).

The negative credit rating path in Panama continued, with S&P downgrading it to BBB-, putting the country one downgrade away from high yield. Moody’s (who has a rating for Panama of Baa3) also revised the outlook on the country to negative.

In Uruguay, as broadly expected, the Frente Amplio centre-left coalition won the Presidential election. This was taken relatively constructively by market participants, especially as the electorate also rejected a controversial plebiscite that would have undone social security reforms.

The National Bank of Poland kept rates on hold at 5.75%. Central bank members indicate that discussions of a potential rate cut could begin in March 2025, since the inflation outlook should be helped by the extension of the energy price cap until after the presidential elections in mid-2025. Economic data has been on the weaker side recently, which also supports a cutting cycle.

Monthly economic data continues to point to Hungary being the weakest economy in the region. Inflation was lower than expected, driven by core items, but due to weakness in the currency the National Bank kept rates on hold, as expected.

In Czechia, the central bank has continued with its cutting cycle but is concerned about inflation, which was higher than expected. The bank is particularly concerned about the persistence of services inflation, and the market now expects the policy rate to remain on hold into the first quarter of 2025. At the same time, Czechia’s economy remains weak and, given its exposure to the German auto-sector, is vulnerable to potential US tariffs on Europe.

The main development in Romania was the presidential election. The result dealt a significant surprise to markets, with a periphery far-right candidate (Călin Georgescu) winning the first round. This sent Romanian assets lower, as the market digested the possibility of much-needed fiscal reforms being delayed and relations with the EU worsening. However, since month end, the first round of the election has been annulled by the constitutional court, with fresh elections likely to be held in Spring 2025.

Inflation in Serbia was higher than expected. Core inflation momentum is now the highest in the region, helped by robust economic activity. As a result, the central bank kept rates on hold versus expectations of a continuation of the cutting cycle.

In Turkey, the central bank kept rates on hold at 50% as expected. Overall, the market is increasingly expecting the rate cutting cycle to begin in December, but this is highly dependent on inflation data (recent prints have been higher than expected). The central bank may also be encouraged by a lower minimum wage hike for 2025; indications from President Erdoğan imply that it will be aligned with the central bank’s inflation target. In other developments, S&P upgraded the country from BB- to BB.

In South Africa, S&P upgraded its outlook to positive, reflecting the improved economic growth and fiscal outlook. Given lower metal prices, however, the country’s terms of trade weakened, causing some pressure on the rand. Economic activity is slowly improving, while inflation was lower than expected at 2.8%, and the South African Reserve Bank continued with its cutting cycle, reducing the interest rate by 25bps to 7.75%.

Ukraine is facing a period of uncertainty ahead of Donald Trump’s inauguration. While Trump may increase the prospect of a peace deal in 2025, in the short term the Biden administration is trying to strengthen Ukraine. At the same time, the Russians are making gains, helped by North Korean troops, and tensions are worsening after Putin amended Russia’s nuclear posture. However, Ukraine’s hard currency bonds have continued to perform well, with a year-to-date return of 57%.

A ceasefire was agreed between Israel and Hezbollah, and given the latest developments in Syria, the situation remains tentative at the time of writing. Lebanon’s hard currency bonds have rallied, although asset prices in the region remain volatile.

The EM corporate debt market (JP Morgan CEMBI) was up 0.6% in November, with high-yield and investment-grade debt contributing equally to returns. The slight fall in US Treasuries was the primary driver of returns in both high-yield and investment grade markets, as spreads were marginally wider over the month. On a year-to-date basis, high-yield debt (11.8%) has been the predominant driver of the overall index return (8.2%), while investment-grade issuers have gained 5.9%.

From a sector perspective, the metals & mining and oil & gas sectors performed particularly well, while the real estate sector underperformed, particularly in Asia after the market was disappointed by the lack of meaningful fiscal stimulus from the Chinese government. Most countries in the index performed well, but high-yield markets such as Ukraine and Argentina particularly outperformed, benefitting from the risk-on tone following the US election.