This edition includes:
- Market background
- Top-down views and outlook for the asset class
- Focus article: A new era of uncertainty presents opportunities for active fixed income investors
- Regional highlights and corporate credit market review
Our EM debt experts summarise market developments across the sovereign debt universe in May and outline what’s taken place in the EM corporate credit market.
The fast view
Market background
Inflationary pressure was ongoing and uncertainty surrounding the war in Ukraine continued. The US 10-year Treasury yield surpassed 3% for the first time since 2018, but fell back as growth concerns increased. The EM local bond market gained 1.8%, helped by currencies in Latin America. The hard currency index ended the month broadly flat, helped by investment-grade names, while high-yield lagged.
Africa
Central banks in Ghana, Kenya and Nigeria were among those to hike rates as currency and inflation pressure mounts. Commodity price strength continues to increase the dispersion among fuel importing/exporting economies. Egypt continues to make progress in securing external funding; the World Bank and Gulf Cooperation Council committed large amounts, while it continues to work towards an IMF program.
Asia
Growth dynamics in China dominated newsflow as a clearer picture emerged of the extent of the impact of COVID-related restrictions. Inflation data was mixed, but on balance it printed above expectations, although this is from a relatively low base compared with other regions. There were also some signs of a more protectionist policy stance, as countries tackle food supply issues.
Latin America
Many of the region’s currencies strengthened on the back of improving global sentiment, as well as the continued strength of commodity prices. Inflation remains high and central banks remain hawkish. In Colombia, results of the first round of the presidential election took much of the market by surprise, as a late surge in momentum saw independent candidate Hernandez reach the second round.
Central and Eastern Europe
The EU’s oil embargo effectively cut off 90% of Russian imports. Inflation generally continued to surprise to the upside and rate hiking continued. But signs that monetary policymakers are shifting into a more reluctant phase of the hiking cycle caused some concern over central bank credibility. It became increasingly clear that the EU and Poland will reach a compromise on Recovery Fund flows.
Rest of Europe, Middle East and Africa (EMEA)
While war continues in Ukraine, there are some signs of the economy normalising. But Ukraine is facing a c.US$5 billion a month funding gap, which the G7 has agreed to help plug. In South Africa, S&P held its credit rating at BB-, but upgraded its outlook to positive. Elsewhere, election results in Lebanon suggest that it will be even harder for parliament to approve the required reforms for an IMF program.
EM corporate debt highlights
Against the backdrop of persistent inflation, rates volatility and the COVID lockdowns in China, the JP Morgan CEMBI returned -0.6%. The negative move was driven mostly by high-yield bonds, which fell 1.1%, while the higher quality investment-grade market was more resilient and ended the month 0.2% down.
