Chapters
Market background
Fixed income markets began the year on a volatile note, reflecting oscillations in government bond markets. Cautious rhetoric from some members of the US Federal Reserve’s (Fed) rate-setting committee, coupled with surprisingly strong economic and labour market data, prompted a sell-off in the 10-year US Treasury market. Subsequently, however, signs of improving inflation dynamics, more dovish rhetoric from the Fed, and a temporary sense of relief (Trump did not immediately impose tariffs after taking office) persuaded markets that two rate cuts are still possible this year; the Treasury yield retreated somewhat to end the month broadly unchanged.
It was a better month for emerging market (EM) currencies after the sell-off seen, with the US dollar weakening after Trump’s initial hints at a softer stance on tariffs. Within emerging market economies, China reported stronger-than-expected growth, thanks to ongoing strength in exports, but activity levels in both the manufacturing and services sectors were weaker. In Latin America, divergent trends in inflation saw rates being cut in Peru and hiked in Brazil. Capping a strong year for the country’s economy, Argentina reported a fiscal surplus for 2024. Turkey’s current account data was better than expected and the central bank cut interest rates for the second time in this cycle, as expected. Meanwhile, encouraging inflation dynamics in South Africa increased the prospects of a rate cut there. Elsewhere, developments in Lebanon – namely, the appointment of both a prime minister and a president and hopes for an improvement in the geopolitical situation – were supportive for asset prices.
Against this backdrop, EM fixed income and currency markets posted gains. The local currency debt market (JP Morgan GBI-EM GD) gained 2.1%, driven by local currency strength. The hard currency sovereign debt index (JP Morgan EMBI GD) finished the month 1.4% higher, with strong performance from some high-yield markets again providing a boost. In the corporate debt market, the JP Morgan CEMBI BD gained 0.8%, with the high-yield segment outperforming investment grade.
