Chapters
Market background
Yields across government bond markets rose in October, resulting in emerging market (EM) fixed income posting negative total returns. Data pointing to resilience in the US labour market and improving consumer confidence led to the market pricing out several interest rate cuts from the Federal Reserve. This drove up US Treasury yields and caused the US dollar to strengthen – weighing on EM currency (EM FX) markets, particularly in Asia and Latin America. Sovereign bond yields also rose in Europe, although not as sharply as in the US. This was against the backdrop of the European Central Bank turning more dovish and reducing rates by 25bps, the first back-to-back cut in 13 years.
Against this backdrop, it was a weaker month for the EM debt asset class. On the local currency side, the JP Morgan GBI-EM GD fell by 4.6%, mostly driven by EM FX moves. Most index constituents posted negative returns, with exceptions to be found in some smaller markets such as Nigeria, where continued progress on currency reforms boosted the currency.
Turning to the hard currency market, following a strong third quarter, the JP Morgan EMBI GD index declined by 1.7%. This was primarily driven by investment-grade markets, which are more sensitive to rises in US Treasury yields. Returns were negative across regions, with some exceptions such as Sri Lanka – where bonds rallied after the country reached an agreement with the IMF on restructuring terms of its foreign currency debt.
