Senior Portfolio Manager Anthony Kettle’s weekly BlueBay Emerging Market Debt commentary offers readers a concise yet wide-ranging macro overview. Kettle covers markets large and small, providing insight on how financial, political, and economic developments in one region affect markets elsewhere. Here is his latest insight.

Summary

Risk markets were mixed this week as negative impulses from a re-escalation in tensions with Iran and higher oil prices were mitigated by a rebound in chip stocks. This resulted in the S&P 500 gaining +1.2%, the Euro Stoxx 50 losing -1.4%, and emerging markets (EM) equities gaining +0.4%. The US rates curve saw a bear steepening, with 5-year yields up 7 basis points (bps) and 30-year yields up 7 bps. 10-year US real rates were 5bps higher to end the week at 2.30%.

In EM credit markets, spreads were 3bps tighter for corporates and 4bps tighter for sovereigns, while total returns were flat and down -0.1%, respectively. In the corporate space, the oil & gas and infrastructure sectors outperformed, while the metals & mining and transport sectors underperformed. In the sovereign space, the notable performers were Ukraine, Mozambique, and Senegal. The biggest underperformers were Paraguay, Chile, and Costa Rica.

In EM local markets, returns were up +0.2% with rates marginally outperforming. In the foreign exchange (FX) space, the outperformers were the Colombian peso, Brazilian real, and Dominican peso, while underperformers were the Polish zloty, Hungarian forint, and Turkish lira. In the rates space, the Dominican Republic, Brazil, and Uruguay outperformed, while Turkey, Hungary, and Czech Republic underperformed.

Market highlights

• Argentina presented its 2026-27 financing plan, which shows 2026 as comfortably overfunded, while 2027 is seen as covered. The government continues to access cheaper multilateral loans at 6.3%-7.7% rates rather than tapping the bond markets. Potential financing options include a USD2 billion from the World Bank and USD1.2 billion from the Inter-American Development Bank (IADB) which, alongside domestic debt rollovers and privatisation proceeds, will provide near-term breathing room ahead of a USD4.2 billion bond payment due on 9 July.

Market outlook

Geopolitical tensions have escalated sharply following President Trump's reinstatement of the Strait of Hormuz blockade and proposed 20% cargo toll, leading to fears of further disruptions to shipping. US strikes on Iranian targets have pushed Brent to USD86/bbl and WTI to USD80/bbl as markets price in another energy shock, and earlier in the week this had triggered a repricing of Federal Reserve (Fed) rate hike expectations with a 40% probability for July. However, a meaningfully lower Consumer Price Index (CPI) print versus expectations, with core services in particular showing disinflationary trends, has calmed the rates markets and pushed expectations of the first full Fed hike out to December this year.

For EM fixed income, any renewed energy shock is likely to drive a re-run of the moves seen at the start of the Iran conflict, with oil exporters sharply outperforming. However, we would note that oil prices never reached the USD150-200/bbl range that many analysts predicted at the time, and given that most investors do not expect a full-scale return to conflict, it seems likely that the market impact will be more muted this time around. Nevertheless, we do see commodity exporters in Latin America as well-positioned to navigate the current environment, while Asia's energy-importing economies—particularly those with higher Middle Eastern reliance—are likely to remain under pressure. Central bank patience is also waning as inflation risks broaden, though most EM central banks likely remain more patient than markets currently price. While EM credit spreads remain historically tight, all-in yields continue to offer value, particularly in light of the low level of defaults currently being seen in the market. It is the EM local markets that we would expect to be more volatile, with the Fed stance, together with any meaningful moves in terms of trade, likely to be the strongest near-term drivers of performance.