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 benefitted this week from renewed hopes around de-escalation in Iran, as well as a rebound in sentiment in the tech sector. This resulted in the S&P 500 and the Euro Stoxx 50 gaining +1.0% and +1.2%, respectively, while emerging markets (EM) equities also gained +2.3%. The US rates curve saw a bear steepening, with 5-year yields up 2 basis points (bps) and 30-year yields up 12bps. 10-year US real rates were 2bps higher to end the week at 2.45%.
In EM credit markets, spreads were 2bps wider for corporates and 1bp wider for sovereigns, while total returns were flat and down -0.1%, respectively. In the corporate space, the transport and infrastructure sectors outperformed, while the pulp & paper and real estate sectors underperformed. In the sovereign space, the notable performers were Gabon and El Salvador. The biggest underperformers were Jamaica, Ecuador, and Panama.
In EM local markets, returns were up +1.1%, with foreign exchange (FX) contributing +0.7% and rates +0.4%. In the FX space, outperformers were the Chilean peso, Colombian peso, and South African rand, while underperformers were the Turkish lira, Brazilian real, and Indonesian rupiah. In the rates space, Turkey, South Africa, and Colombia outperformed, while Uruguay, Peru, and Malaysia underperformed.
Market highlights
Bolivia has reached an agreement with the International Monetary Fund (IMF), in a move that should relieve near-term external pressure and help rebuild policy credibility. The USD1.9 billion extended fund facility, alongside a further USD5 billion in unlocked multilateral financing, will shore up foreign reserves following the currency’s depreciation since June’s liberalisation. Congressional approval looks secure, with broad backing from centrist and conservative blocs, but the harder task is delivering the ambitious fiscal adjustment and structural reforms the programme demands. The President’s diminished political capital—approval ratings have halved to 38% since the start of the year—combined with a track record of retreating on unpopular decisions, points to a bumpy path, particularly on public-sector downsizing. Labour unions and co-operatives exposed to the reforms retain real capacity to mobilise, layering execution risk onto what is otherwise a constructive step towards macroeconomic stabilisation.
Market outlook
Markets have increasingly shifted focus from the immediate geopolitical shock towards de-escalation, with ongoing US–Iran negotiations and reports of a potential Strait of Hormuz reopening agreement easing energy supply concerns. Combined with OPEC+ adding supply for a fifth consecutive month, Brent crude oil has retreated to around USD80/bbl from mid-USD80s highs. The Federal Reserve (Fed) held rates steady last week, but Chair Kevin Warsh’s press conference was interpreted as dovish. Even so, the dominant narrative was the market’s willingness to lean into Middle East de-escalation trades as inflation expectations eased over the week. Further support came from coordinated signalling by the US Treasury and Japan’s Finance Ministry aimed at encouraging yen appreciation and, in turn, reducing the risk of large-scale Japanese selling of US Treasuries. Bond yields have since edged lower as a result, and risk markets have regained their poise; in particular, AI-related technology stocks have recovered momentum, driving robust rebounds in the Nikkei and KOSPI, led by memory and semiconductor names.
For EM fixed income, the backdrop remains constructive, though investors are increasingly rewarded for selectivity. Oil’s retreat eases pressure on energy importers, although commodity exporters should remain well-positioned at current levels, and attractive carry, resilient sovereign fundamentals, and contained default expectations continue to support the asset class— particularly as many EM central banks retain scope to ultimately be more accommodative than markets price. We favour event-driven opportunities in EM credit and continue to see selective opportunities in local markets, where performance should benefit from the tailwind of de-escalation in the Middle East, alongside greater stability in core rates.
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