EM Fixed Income: Carry on, notwithstanding core market shifts

**Ben Ramsey** (0:03)
Hello, and welcome to our At Any Rate Emerging Markets Focus Podcast, a place for us to discuss recent developments and key issues of focus in the emerging markets fixed income asset class.
I'm Ben Ramsey, Head of EM Sovereign Credit Strategy here at JPMorgan, and I'm joined by Tania Escobedo, Senior Latam Local Market Strategist, and YM Hong, Head of EM Corporate Credit Strategy, both at JPMorgan. Tania, who I am, thanks for joining.

**Tania Escobedo Jacob** (0:29)
Thank you very much, Ben.

**YM Hong** (0:30)
Yes, Ben.

**Ben Ramsey** (0:32)
So markets have been easing into August vacation mode, but they continue to need to deal with some important top-down macro developments. Namely, we've got some ongoing market digestion of last week's Fed meeting and the calibration of the reaction function ahead. There's been a better tone from the Middle East, and oil prices have reflected that.
This combination has led US rates to trend a bit lower, but we're still certainly higher than where we were, say, a couple months ago. The curve is steeper.
And then, of course, we've had this significant intervention in the Japanese yen, which is, in terms of EM fixed income, raised maybe some doubts on FX carry trades, even as we've had US dollar weakness versus euro and versus other EM currencies kind of back in place. So, you know, overall, risk markets have remained really strong, despite these shifting important sort of top down talking points. Equities have surged again on the back of strong earnings and a renewed AI mega cap tech bid, and helped again by this sort of easing geopolitical risk and lower oil. So, you know, a market tone, which kind of wants to be a sleepy August, I think solid performance has allowed that a bit. But, you know, it's hard to ease into vacation mode when a lot of things are still moving.

**YM Hong** (1:59)
Thanks for writing the backdrop, Ben. Let me actually pose you a question first.
Could you tell us how EM assets have fared so far in this backdrop? And also, on the sovereign side in particular, how would you characterize your views at the moment?

**Ben Ramsey** (2:16)
Yeah, thanks, William. So, we'd seen this very strong recovery in EM fixed income markets. But basically, after we had the initial ceasefire at the end of March, in terms of the Iran conflict.
And we've seen in that context, initially some headwinds, I would say, on local markets which came from maybe some renewed dollar strength, that in terms of starting to incorporate the Fed into the equation. EM local markets, as we've been discussing on this podcast, in terms of the frontier side have been really quite strong. I think we saw a pretty strong performance through May and June on the credit side, both corporates and sovereigns. You know, what we've seen over the last month, particularly now talking about sovereign side is actually a bit of sovereign underperformance in the course of July. And underperforming a bit versus corporates, I'm going to of course ask you about. And I think here a lot of that issue is probably just the fact that EM sovereigns have a longer duration and longer duration versus corporates because we have seen this move higher and move steeper in terms of the treasury curve.
We've had some other underlying dynamics on the sovereign side that have contributed. Brazil's been a little bit of a headwind to sovereign returns, but that's a large weight in terms of the sovereign index. What we've seen in the last week is all of our fixed income markets recovering pretty strongly. I think this idea of dollar weakness, notwithstanding what we're seeing versus the end, and we'll get to that with Tania, has certainly helped underpin local markets. Again, we see this sort of strong global growth narrative stay intact, led by the AI and tech side. Once we see risk on stock markets on weaker dollar, that helps the fixed income generally. We've seen sovereigns, I think, bounce back pretty strongly in that context. We're getting back towards what are the high points in terms of year-to-date returns, after again, returns had underperformed a little bit, particularly on the sovereign side over the course of July.
So, baby, let me turn it back to you, YM. On the EM corporate credit side, in particular, you've done some work comparing Sembi investment grade spreads to US high grade. We've seen the compression of EM versus the US in the investment grade space. So what have been the drivers and what are your expectations around this narrative?

**YM Hong** (5:01)
Thanks, Ben.
The spread of Sembi IEG over US high grade has indeed been compressing. If you look at historically, then the typical range was between 20 to 40 basis points. That compressed to about 15 to 25 basis points from 2024 onwards, and tightened further to only about to 10 basis points coming into this year, 2026 Part of this is simply due to overall spread levels being tighter than before, but that does not explain it in its entirety. In particular, we are seeing periods when the basis moves close to flat, and we think this is coming mainly from the US high-grade side, where heavy supply from hyperscalers and other AI-related issuances leading to some technical pressure, which we don't really see here in EM corporates.