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

This past week saw rising tensions in the Strait of Hormuz, with the tentative ceasefire being challenged by inflammatory rhetoric on both sides. The net result for markets was higher oil prices and higher core yields. Against this backdrop, the S&P 500 proved resilient with gains of +0.1%, whilst the Euro Stoxx 50 and Emerging Markets (EM) equities lost -1.4% and -2.5%, respectively. The US rates curve saw a bear flattening, with 5-year yields up 26 basis points (bps) and 30-year yields up 18bps. 10-year US real rates were 18bps higher to end the week at 2.07%.

In EM credit markets, spreads were 9bps tighter for corporates and 1bp tighter for sovereigns, while total returns were down -0.5% and -1.1%, respectively. In the corporate space, the infrastructure and real estate sectors outperformed, while the transport and oil & gas sectors underperformed. In the sovereign space, the notable performers were Ukraine, Venezuela, and Papua New Guinea. The biggest underperformers were Senegal and Argentina.

In EM local markets, returns were down -1.8%, with FX contributing -1.2% and rates -0.6%. In the FX space, outperformers were the Peruvian sol, Chinese renminbi, and Turkish lira, while underperformers were the Brazilian real, Hungarian forint, and Indian rupee. In the rates space, Hungary, China, and Uruguay outperformed, while Turkey, Colombia, and Brazil underperformed.

Market highlights

• Brazil's Banco Master, a mid-sized bank that collapsed in November 2025 due to a USD2.3 billion fraud, has become central to a political scandal affecting the 2026 presidential election. Recent reports indicate that right-wing senator Flávio Bolsonaro—the leading challenger to President Lula—sought USD24 million in financing from Banco Master's owner, Daniel Vorcaro, for a film about his father, former president Jair Bolsonaro. Flávio denies wrongdoing and states that no public funds were involved, but the revelation has triggered market volatility and raised questions about political influence at the bank. The scandal implicates figures across the political spectrum, including government officials and Supreme Court judges with potential conflicts of interest, reinforcing concerns about corruption within Brazil's state institutions. Brazilian local markets have sold off sharply because the controversy could pressure Flávio to exit the race, which would potentially benefit alternative right-wing candidates as well as bolster the chances of the incumbent government, which is seen as weaker on the economic front.

Market outlook

The macroeconomic backdrop has deteriorated due to the ongoing Strait of Hormuz closure, which is fuelling stagflation concerns. Brent crude prices are near USD110 per barrel, and a sharp global bond selloff—with 30-year Treasury yields exceeding 5.10% for the first time since 2007—contrasts starkly with the S&P 500, which remains near all-time highs. This divergence reflects mounting inflation expectations as higher energy costs ripple through the economy, coupled with growing fiscal concerns, particularly in the UK, where political uncertainty around PM Starmer's leadership has added further pressure. Central banks have shifted decidedly hawkish, with markets now pricing in 62% odds of a Federal Reserve (Fed) hike by December (up from 6% a week prior), and 89% odds of a European Central Bank (ECB) June move. On the positive side, the Trump administration's apparent sensitivity to bond market moves, coupled with Treasury Secretary Bessent's stated willingness to deploy policy tools if 30-year yields breach 5.50%, suggests a potential floor for long-end rates, though near-term volatility will likely persist.

For EM fixed income, the sharp repricing of global rates has pressured EM local markets, while FX has proven more resilient. In credit, higher nominal yields have attracted buyers focussed on yields rather than spreads, keeping spreads remarkably resilient. However, energy shocks, fiscal pressures, and hawkish central bank repricing have created near-term headwinds for EM credit. Encouragingly, this week's flow data shows a silver lining: EM bond inflows rebounded sharply to USD1.9 billion (+0.42% of weekly AUM), benefitting both hard currency and local currency funds equally. This flow resilience indicates that investors continue to perceive value in EM credit spreads despite near-term rate pressures and geopolitical risks. We maintain our preference for Latin American commodity exporters and EM economies structurally benefiting from elevated oil prices, while remaining selective on Asia given its energy shock exposure.