EM Fixed Income: Summer ending but the heat is still on

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 JP Morgan and I'm joined by an Esca Tristavova head of EM Emia and Latin local market strategy and Nesca Pajari are senior Emia EM Sovereign Credit Strategist both the JP Morgan and Esca Nesca. Thanks for joining. Hi Ben, thanks to be here. Hi Ben, thanks. So Summers pretty much over in the UK and Esca Nesca you guys are pretty much back in business here in the US we're still holding on to those last long bays with our Labor Day holiday coming up on Monday but definitely the sense is that markets are gearing up for the sprint that tends to occur once we hit September for our emerging markets fixed income asset class we're still assessing what some of the importance shifts that we're seeing in the core markets mean for us. I guess perhaps the most notable is that the Iran conflict is still growing hot again and oil isn't even and the of course in the side that core rates are continuing to push higher. US Treasuries are approaching multi year high levels in the 10 year segment and continuing to test highs not seen in two decades in the 30 year bond. So in this context we've seen the yield on the the GBA IEM which is our local markets bond index is spike higher you know after the Iran conflict it was an easing announced pushing back again to the highs of the year. We also have Jackson Hole and that's obviously always an important milestone in this year fed wash use the chair wash use the occasion to to clarify some points and carve out what seems to be a more hawkish stance. That in turn is got the dollar regaining its footing and and also we're seeing of you know hawkish stance here underpin by growth which is really been quite solid. So this combination of strong growth high rates high oil and yields for the hard currency side we're seeing that kind of is elusive recession risk and let's kept credit spreads really tight and rain sound but but let's start with you in Eska and let's talk about local market side first. So if I've painted the picture that way you know pretty hot environment high rates dollar now starting to get stronger again let me take your temperature in this environment and how do you recommend navigating this backdrop for local markets and EM starting on the right side. Right so we've seen actually quite decimals in rates as you've mentioned in some countries you see even seen yields come out of the years ranges. We start back and we've been discussing it on this spot test quite few times we we read this environment really as a reflection or a cyclical backdrop continues to look strong and at the same time we are noticing in a lot of countries quite sticky core inflation developments. Hadoin inflation gave us a little bit of a relief in in the past months over the summer thanks to food prices energy prices coming down but actually the forecast are pretty clear now that even Hadoin inflation will pick up and add to the sticky core inflation pressure so even if we didn't have the sort of at overlay and the global central bank overlay. In several economies we've been discussing that the next direction is a hiking cycle in several economies in emerging markets hikes have been delivered or forecast to be delivered so our debates in many EM economies I wouldn't say no I would emphasize we still have a high yielding group which is in a different place. But in many our discussions have been about you know how many hikes what reasonable terminal rate can we think of. Now obviously into that environment we've had the hawkish comments from the Fed and what I would really emphasize is this is not just the Fed the latest move that impals and obviously it's the most important central bank overlay has come from washes comments. But our economists are at this stage forecasting hikes for I think all DM central banks except two and except two one of those that they are not forecasting hikes is only because they've hiked enough already this year and that's Australia so the environment certainly externally is also pushing in that. Higher yield direction now with that though I really want to address the question about how to navigate that because that's a lot of a question even for us that we've been with this reflationary backdrop that's been guiding our investment recommendations it's not necessarily easy to play the bearish direction so first of all the reasons I will has been quite fast. And sharp and usually that is not a great moment to chase for the reprising in that direction so I think that that's worth acknowledging second thing worth acknowledging is that in bearish environments. Pay positions tend to deliver profits in very kind of past periods of fast reprising I think it's the same also for the equity markets bearish rates for equity markets work in a bearish market only for a relatively small share of the time so one has to be very good at picking those moments of what kind of structural views it's very hard to be in the persistent reposition in the bearish direction. So when I combine that I think one has to be a lot more tactical in this environment we've certainly been a lot more neutral on rates and where we have spent a lot of time is more on RV expressions specific ideas in critic stories and another theme that we have been exploring is also steeper as we think kind of globally as well as any makes sense in a lot of countries. Okay so with that on the table let's turn the currencies as I mentioned before you know the dollar is certainly off the highs that we had seen earlier in the year but after weakening it's it's now started to firm up again post checks and all. Do you fade that move or did it really depend on how much the Fed actually delivers and what would make you question the more constructive stance that you've been holding for EM effects up to now. So well we can never really escape the pressure from the Fed but the scale really matters so the market is pricing or already over two hikes for the Fed and we've already seen a lot of reprising so I think for me again if we step back the key driver behind the scenes is the fact that the global cyclical resilience. Seems rather synchronized I wouldn't say necessary equal but certainly synchronized we are struggling with the idea of a US exceptionalism here. There's certainly shades of it but I think that is also priced already in the over two hikes that I've mentioned for the Fed for really the US outlook or the Fed outlook to cause issues for EM effects. I think we would have to go back to the period of US growth exceptionalism that they can drive also interest rate exceptionalism and the way I've described the environment it really looks a lot more synchronized which for EM effects that holds usually a carry advantage is a supportive environment. We've certainly had many questions along the lines that the only look at correlations over the past several years generally rate selloffs have been negative for EM effects. So the fact that we've described a rather bearish price action in rates recently I think normally over the past several years we'll have triggered also negative reaction in effects actually think the quality pretty runs the other way but certainly they would go exist it will be negative rates price action and negative effects price action. I think the way we are looking at it and bring via now already in the fourth year of EM growth upgrades I know that sounds like a long time but when we look at tipy Morgan EM forecast revision index it's actually really been four years. We are kind of looking at frameworks that capture other periods where the rates repressing was happening really and the strong cyclical outlook and in those you can really see those divergences that effects that's okay. And rates does not so for us the rates reprising yes we do have to pay attention to the scale of fat hikes but it's not a detriment to EM effects per say and it's certainly not a detriment to EM Harry in particular as one more specific theme within EM effects. So that let me turn back to you then on the EM credit side you mentioned spreads have been range bound. What do you think it would take to see them break out of range either higher or lower. Yeah I think that's a good question it's hard to identify a catalyst right now I mean on the high side I think that's an easier question if we have some hints that we're getting. recession risk come back into the table. That's something certainly that would jostle spreads from very tight levels. We've been, you know, looking at the relationship between EM hard currency spreads and DM counterparts in the context of all this hyperscaler issue and so that's something we've talked about on this podcast. The view we're holding right now is that technical is not going to do it alone. So I think we're sticking with this view. Now in terms of breaking into something in a tighter range, you know, I think that that's, you know, we're already pretty high all in yields. So I certainly think that if we have something that moves back a little bit more towards Goldilocks, which is obviously, you know, an environment that works really well for local markets as well, but growth staying strong inflation starting to easing it to ease and we see, you know, again, we remain pretty solid constructive on on EM sovereign fundamentals. You know, I think that that's that's an environment that where we we can see, you know, spreads potentially start to narrow, but I don't think we would, you know, overall where it's such historically tight ranges, you know, the the the idea that we're going to move more narrow and spreads from here when we've kind of really established a pretty tight range for the last couple of months. I think it's it's probably actually like Goldilocks, but on the hot, it's a little bit on the hot side. So inflation is not yet in a place where we're getting extremely worried, but still is staying a little bit high, and that's keeping sort of yields and real rates on the high side. And that I think, you know, can probably lead to a grind either, but hard to see how we break out of these ranges in terms of the catalyst sits for not really seeing recession. And and the other catalyst is also in which it's not about to turn the quarter in terms of Goldilocks. So so long as we have and, you know, basically a hot environment and high energy prices. How about the fall in issuance pipeline? Are you expecting it to ramp up for EM sovereigns as tends to happen or do higher yields and higher boring costs make sovereigns think twice here? Yeah, I mean, on this side, you know, I think where it works, we've seen a lot of front-loading in terms of issuance. And I think at this point, what we're expecting is, you know, we're going to have sort of a regular fall issuance calendar. We have already seen some sovereigns, even before we've, as I mentioned, sort of gotten fully into the fall period. We're still not getting it Labor Day in the US. We've seen some some sovereigns come to market this week, broadly speaking, you know, I think that we've we're probably going to see a little bit of price sensitivity to these types of yields, but not not too much. I mean, at the end of the day, I think governments have now internalized the fact that borrowing costs are kind of significantly higher. I mean, it's when I, at this point, you know, if we look at the overall MBA and where the yield is, we're at about seven in a quarter for where the yield is of the MBA. And here I'm sort of referring still to our traditional benchmark index. So we've discussed, we're doing some transition here in terms of what the MBA we're talking about. That's lower by about 20 basis points than the average yield we saw in 2025 when we had a very strong year for issuance. It is however about 20, it's about 35 basis points higher than the average we've seen over the last 12 months. So certainly this sort of core rates is pushing up the borrowing cost that sovereigns have enjoyed for the last year. That can make, I think they're probably happy that they've done, but looks like a lot of front loading in the first half of the year. I think we're still going to see up to opportunistic issuance and we're going to see a very strong year for gross issuance. Net issuances, you know, not going to be as strong because we are seeing the cash flows going back into sovereign markets in terms of coupons and higher amortizations offset that to some degree. Where we do get, you know, a little bit more sensitive is when we get into the lower rated category and we look at sort of what those all in borrowing costs are there. In a similar way, we're still slightly below what the average it was for the single B category in terms of all in yields last year. So about eights, you know, we're only barely below. We're kind of reaching that that 2025 average around 875. So that's getting a little bit closer to prohibitive. I mean, I think we really need, once we get a well above 9%, 9.5% is when we really think that we're more worried about the market being closed for the lower rated issuers. So I mean, that's one to watch, certainly. And I think that that's, you know, potentially the, you know, the Achilles heel here when we in a high core rates environment, even as spreads continue to narrow. So let me now bring in Nisha. Nisha, thanks for joining us. Let's get into an idiosyncratic story. And it's one we've been watching for quite some time. And that's Senegal. But almost two years now since Senegal announced previously unreported debt, which was worth some 25% of GDP and kind of shocked the markets into thinking that might be unsustainable. You know, two years on, the authorities had been determined to try to avoid any payment event as long as they could. But it seems the IMF is apparently finally convinced them to to throw the towel and that some type of debt treatment is going to be inevitable, which they've now announced in order to restore sustainability and win and to unlock a new IMF program. So could you walk us through this and let us kind of give us a sense of what's going to come next? Sure, sure, Ben. Thanks for having me. For the past few months, we have been asking this question for Senegal that whether it's a question of when, then if so the debt treatment news that came in two days back was hardly surprising. But what was surprising that it came in a bit sooner than we expected. So everyone expecting seven around the end of the year or say Q4, but came a bit sooner. From year on, let's me break down this process into two parts. One is how they get the IMF program. So they've got the SLA, but they need to get the IMF program and two, how they will go about the debt treatment process. On the IMF program, as I said, they've already have the staff level agreement that's the SLA. And now to get the executive board approval, they will need to do some kind of prior actions, which is mentioned in the staff level agreement. What those prior actions are is one, they will have to do the corrective actions that was prescribed to them on the prior misreporting case that has been well-flacked. Second is they will have to now get the financing assurance from the other credit partners that will plug the fine funding gap for the program to be fully financed. Once this two is done, they'll get the executive board approval. Now, moving on to the debt treatment plan, there are three things that I can think of that or authorities need to do first. On the very first thing, they'll have to now formally apply for the G20 common framework. They have just said that they intend to do so. They have not formally applied. So they will have to formally apply to that and they say that it will be an improved or enhanced version of the common framework. On the second thing, they'll also need to do a medium-term macroeconomic framework plan for IMF to do their debt-sustaining with the assessment. Once the IMF will do their debt-sustaining with the assessment, we will get a base for the restructuring talks on how the negotiations will follow. And finally, they will have to determine the scope of debt perimeter under restructuring. They have already told us that they do not want to want to include CFF rank or domestic denominated debt in the perimeter, but even on the externals, they will have to determine what they want to include and what they want to exclude. Once all of this is done, they will have to reach out to the partners for negotiation and debt relief. So this is how we think the process will follow. It's not going to be simple, it's not going to be straight lines, not going to be easy, but let's see how it pans out. So let me ask you a little bit more about this improved or enhanced version of the common framework. So of course, we've been following the common framework and all the developments surrounding the sovereign debt-restructuring landscape quite closely for the last few years. But I think I missed the memo here on what the enhanced common framework is. What exactly is Senegal talking about here? Yeah, exactly. So the debt treatment announcement wasn't a surprise. The biggest surprise was when they said that they wanted to do an improved version or the enhanced version of the common framework. Well, the issues on the common frameworks side have been well-flagged. We have been speaking about it for the past two to three years. But as far as I'm aware of, there has been no formal communication or informal documents stating there is an improved or the enhanced version of the common framework around. The authorities didn't mention about it in their statement, which was a bit more generic. So what the statement states says, the government intends to make full use of the enhanced common framework or the improvements available, which includes shorter timelines, and an sharing of information early on with all the creditors' parties, and parallel engagement with different classes of creditors, which is quite important, and agreed member of the a memorandum of understanding template and greater transparency of comparability of treatment. Well, this is good to know, but it is quite generic, and we will only know about it as the time progresses. But for now, it's just a wait and watch for all of us. Okay, now that sounds good in the theory, and certainly there's been a lot of meetings to try to figure out ways to improve the common framework, the global sovereign day round table, etc. So let's see if all the actors who are at the table can figure out how to coordinate to do that in practice. We certainly hope so. Well, that brings us to the end of this JP Morgan at any rate. MRG Marking spoke with podcasts. Thanks to you, Anesca and Nisha for joining today, and thank you all for listening. We hope to have you back again with us for the next one. This communication has provided for information purposes only. Please refer to JP Morgan Research Reports related to his content for more information, including important disclosures. 2026 JP Morgan Chase and company All Rights Reserved. This episode was recorded on the 3rd of September 2026.