EM Fixed Income: Summer of carry, but getting crowded?

Hello and welcome to our at any rate emerging markets focus podcast of a place for us to discuss recent developments and key issues of focus in the emerging market fixing come as a class. I'm Aneshka Kristova head of Emia, EM and Lata vocal market strategy here at JP Morgan and I'm joined by Ben Ramsey head of EM sovereign credit strategy and I am a jabi head of frontier strategy, both at JP Morgan Benio. Thanks for joining. Thanks Aneshka, it's good to be here. Thanks Aneshka. So we have had about two week summer break in our regular podcast but always the markets have not had a break and we had some very interesting moves across asset classes. The dog up pressures on EM have eased with the DXY down about two and a half percent since the end of July and DXY is basically back to May levels. Both the way in and very recently you're a dollar have contributed to that by contrast rate markets have had a minimal reprieve especially in the long end of curves with US two stands generally under steepening pressure. Most commentary including our own race strategist in the United States, just that yesterday's treasury buyback announcement is unlikely to have a durable impact on US long end yield. So with that in mind it does look like the mixed bag for the external backdrop for effects in rates looks likely to continue. We also continue to have plenty of uncertainty on energy prices and Middle East developments and many other issues are obviously playing out including extreme weather events which have occupied a fashion of the attention here in Europe. Against that the summer has proven to be a summer of carry and we will discuss on this podcast how far has carry positioning extended with a special focus on frontiers for some of those carry plays are concentrated. So Nesca let's start with you could you take us through the latest Fed developments and US yield developments and most importantly how do they influence EM local rates. So yeah let me provide a little bit of the backdrop obviously it's been a summer break. So two year US yields picked probably in the last week of July then we had a number of weaker data releases that was payrolls retail sales CPI release didn't provide any headaches and PPI was a bit lower. We see it very clearly on some of our favorite indicators such as JP Morgan easy index which really picked at the same time as US two year yields which basically at that point came off. With pricing less urgency on that action and that's also the commentary from our US economics team that well the urgency decreased till the next move is likely a hike in December. Now 10 year yield though have not come off and the market has been focused on the suits deepening in the two stands curve measures of term premia going higher. We have seen some commentary focusing on potential fed credibility issues but it's not something that we think is the major driver here by contrast. What do we think it's a major driver of the 10 year point of the curve is simply demands apply dynamic in a world which has a lot of demand for funding hyper scalar issuance fiscal deficits are very large. And that share of US treasury that have had holdings not decreasing so there's a lot more interest rate sensitivity in the in the demand for US tragedies. Now what has been important for E M so first of all when US curve is deepening we generally see the impact on our market to it's a very correlated move most of our markets have steeped over the same period. There is certainly the effect of competing for that same funding which impacts on our curves as well what I would though highlight is that almost no market in E M steepen more than the US curve so it does not seem to be an E M let issue in fact from a very structure perspective I will say that E M funding backdrop is in a better place we see it in the current compositions it is in general structure less less reliant on foreign funding more reliant on domestic sources of funding compared to history so that is a little bit of a source of protection against these moves but always the only to some extent. Even if we didn't have these external pressures we actually see the case for steepening and a lot of your markets also on bottom up drivers that obviously does not apply to every economy but in several we have seen that had line inflation has come up for the time being. Thanks to our energy prices for food prices but actually underlying pressures that should influence the medium firm rising thanks to sticky core inflation so I think that's kind of more the E M angle there again stepping back we have on this podcast several time argued that E M rates in general not in the greatest place if you have strong inflation pressure and a strong cyclical outlook. It is not an easy directional call for E M rates and I think the latest development to vindicate a bit that more cautious bias that we've helped on rates in general in this environment. Great so let's pivot now maybe to the effects perspective is there a read through here for E M FX from these US dollar US yield moves I mean certainly we saw a weaker dollar in the last couple of sessions on the back of the announcement of some interview well increased by backs on the margin and the treasury curve. This is meaningful how do you see your views on E M FX evolving in this context we actually received a lot of questions on this topic. How does the steepening in the US curve the two stands impact on E M FX and to be honest with you actually it's really hard to prove on a systematic basis because the two stands moves hide so many factors in them. That normally we actually don't see that consistent reactions to that particular driver in the FX space simply you'd have to know a lot more than just the steepening you have to know what are the drivers behind this. Obviously the reaction to Bessence announcement does tell us that some of the competition for funding has played a role but actually what I think we can prove as a lot more important drivers for E M FX the more consistent drivers. I think I'm not the steepness of the curve I would say what we are focused on is the 10 year US real yield that has actually come off very very recently. It does look like that some of the pressures or the repressing of US real yield that have more consistent impact on E M FX has concluded at least for the time being and we also see larger correlations or more consistent correlations to the two year point. So rather than the steepness I would focus on 10 year US real yield and on the two year point which both have eased the pressures on our asset class and we are certainly seeing that impact. I think it's also been an interesting phase of something that we have argued it does seem to us for E M FX specifically the US 10 year real yield impact overwhelms the all price of the driver all prices have been going up but actually not having as much influence on negative influence on the M FX primarily because I think the US 10 year real matters relatively more. Now with that I would also mention how is our structure of you evolving we are generally more constructive on E M FX and certainly more constructive on the M FX and on local rates and it is very much grounded in the physical environment and it did make an impression on me how JP Morgan forecast revision indices for growth for E M continue to trend higher you can hardly notice the impact from the Middle East conflict on that chart so I think that background remains unchanged and a positive factor. Now turning over to you Ben and again conscious of the fact that we had a two week break on this podcast can you take us through how credit markets have traded in this environment and we discussed a lot of these external factors some some in more details some more briefly but which ones are the most important right now for credit markets. Well I wish I could tell you that we had a very eventful two weeks and I've got a lot to report to you but to be honest credit spreads have been trading pretty much sideways really if you look at the year we've been pretty much range bound in terms of the NBA global diversified spread absent the spread spike the mini spread spike we had basically February into the end of March at the initial outset of the Iran crisis. We've had the solid months to date so far of returns not spectacular but solid. We've seen effect what we have seen what is noticeable is not so much spreads but it's all yield so the all in yield of of the index if we're looking at our new NBA global diversified duration weighted index we're at about 6.8% in terms of that yield. We are getting close to where we were in terms of the highs. year, which again was that March 31st spike. So it's not spreads. It's really the treasury, the underlying treasury moving higher, which is pushing up yields. You know, it's not a, it's not a, so if we want to think about drivers, we're not yet in terms of borrowing costs. As you've mentioned, anywhere we would be sort of worried about refinancing risks overall for, for sovereigns. I think it is worth mentioning, however, though that we we're seeing if we look at the single B component, where again, spreads there are also pretty much fringe bound. We do see yields have picked up above 8% for that, that bucket, that credit bucket. And we had gotten down to as low as something like seven and a half percent, which is a very low level for that, that range. Very consistent with that lower credit segment, tapping markets and not really worrying about financing risks. I think 8% is not a level which we get too concerned about, but it is moving in the direction where at a credit by credit basis, we do maybe need to, to be looking at, you know, refinancing concerns and ability to tap market. If we look at at the returns months, the date by country, almost everything is positive except for some of the lower rating credits. And the one notable underperformer happens to be Argentina, which has had a rough month, hard to point to anything specific there. And so far as the macro economic numbers still look really solid, especially on the fiscal, especially on external accounts. But we are approaching 2027 slowly, but surely, and that's an election year for Argentina. And I think markets are anticipating a bit prematurely if you ask me some concerns around the election cycle in Argentina. I also know your team, as well as our corporate great colleagues, have published recently on the very topical issue, hyper-scale issuance. Can you talk us through your conclusions and the impact on the embedded from this emerging competition for funding? Yeah, thanks. So both our corporate team and our software team have weighed in on this in recent weeks. As we've described it, we're seeing the AI-capic cycle shifting from something which is really a balanced story, not to a capital market story, as hyper-scalers are tapping much deeper pools of funding across currencies and increasingly be a project finance and data center structures. So this is becoming a structural credit market theme in terms of scale. The issuance is really surged. 180 billion year-to-date accounting for hyper-scalers versus 93 billion in 2025 and about 20 billion per year on average in the prior years. So the key question for EM is whether this competes in any way or disrupts EM spreads and our quick conclusion is not meaningful, not meaningfully, at least not in the near term and not what we've been seeing. On the supply side for EM, software supply has been strong but net issuance is still expected to be below peaks of 2020 and 2025 levels and I think technicals look less disruptive than what we're seeing in the U.S. high grade where net issuance is heading towards a record high. So even though hyper-scalers spreads have widened materially since 2025, the so far spillover as image has been pretty limited, where can it bite in terms of relative value is maybe if we look at actually who owns DM. So some EM IG sovereigns, especially in the triple B triple B minus area are in an out trading tighter than AI-related U.S. credit and the optics here are getting tougher. You can imagine some flexible mandates asking maybe why do we own this and maybe we should be owning that. I think the key nuance is likely the source of rotation is an EM dedicated investors or local buyers. These pockets generally can't and are not going to replace EM sovereign exposure with a U.S. IG hyper-scaler paper. The more relevant margin of sellers are global asset managers, cross-basically crossover investors and even there the exposure looks pretty small. EM IG is typically less than 0.5% of their portfolios in the analysis which we did and their holdings are usually only a small slice of what's this overall EM IG universe. That said, if we do look at the country level, we can see some names like Romania, like a Mexico, less so but a Hungary or a Panama where the crossover holdings are a bit more relevant. So I think those are the names that we could need to look at if we do have a dynamic which shifts, which says hyper-scalers look meaningfully cheap to EM. But overall, I think we're in a world where we think this is pretty segmented and we've seen, not really in the, you know, we've seen episodes where IG can trade the tight to the U.S. high grade and I think that we could be any likely in that head zone right now. Thanks, Pan. It's really a topic that we praise David for several years. So this is a very useful analysis. Finally, I would like to bring you into the discussion. Kerry has remained our main way in town. It's really good returns as well on Kerry strategies in recent months. It should not be a secret to anyone and we know it shouldn't be a secret because positioning is really high in these strategies. Obviously, many of these Kerry plays are in the frontier space. So can you talk us through how much positioning is there in the top markets and whether fundamental still justifies staying in these Kerry expressions? Sure, Nesca. I mean, yeah, you put it quite well that it's no longer a secret that frontier strategies, career strategies have been working for a couple of years. Now, incidentally, during the two-week break of the podcast myself and the team finished inaugural reports on frontier local markets, issuance and positioning as the first time that we're brought together. A large group of frontier markets and I urge your regular listeners to look at it. The highlights in frontier is that positioning is higher. It's close to peak levels across the different markets, but also quite well concentrated. When we look at the most positioned market in nominal terms, that would be Egypt, which we think is now around $35, $36 billion in foreign ownership across T-bills and bonds. That's only $3 or $4 billion below the peak pre-war after going to as low as around $22 billion at the bottom a few months ago. Pretty quickly we've seen a revamp in higher in positioning in that market, despite the fact that there's not been an actual resolution to the war and our touch on some of the reasons. The second name on the list will be Nigeria, where we also estimate around $25 billion in foreign positioning in that market. Now, that's a peak for Nigeria. In the past, we've seen position go as higher as $18, 19, 20 billion, but certainly not in the mid-20s. Again, this is a peak for Nigeria and also very concentrated at the short end to T-bills are being bought by foreign owners. Those are the top two. And then there's a big gap to the rest. I would highlight Kazakhstan as one where we've seen increase positioning slightly different because positioning is expressed via duration. So Kazakhstan bonds are being bought by foreign investors about $5.5 billion at the moment. And then you have the rest, which I would include Zambia in the Uzbekistan, in a lot of the Latin frontier markets also, there as well as Uganda. There's been a recent trend of issuances of global bonds issued in local currency. Many of the Latin countries have gone that route, including Uzbekistan, and also that represent a sizable amount of foreign positioning. So, in summary, yes, positioning is higher than we've had in the past, but just a lot more concentrated. Now, the question you ask is, is this warranted with fundamentals? I'll split the answer into two. The first is fundamentals, but also policymaker reaction function. I think that also has a big impact on why investors have piled into these frontier strategies. In the past foreign, in the past policymakers have tended to limit outflows during periods of volatility. You've had experiences where capital controls were implemented. I must say that in the last, since COVID, in the last couple of years, that seems to have changed. We've seen more central banks in front here going more orthodox in their effects and monetary policy stances and have actually been tested. I believe that that's why Egypt has seen such a quick ramp up back to near peak levels in terms of policymaking. On the fundamental side, frontier markets have exports in commodities in one way or the other. We believe that it's warranted that position is that high because they just got got in such a large. terms of trade, both for many of the commodity exporters. Fiscal policy has also improved. And the monetary policy seems to be a world anchor. So we are not really concerned about a divergence between where positioning is at the moment and what fundamental suggests. I think the one risk or highlight is positioning in duration. So we are worried about the medium term inflation trajectory, given our linear concerns, agricultural input concerns, energy price content as well. So in the medium term, we're worried about inflation across frontier. And as a result, we're quite cautious on duration. But that's not being reflected in the positioning trend. Like I mentioned earlier, it was concentrated in carrying and is now being extended towards duration. That's the one area that I would express caution. But in a very linear term, I expect that we'll come in to see an increase in positioning. There are a few technical reasons why that would be the case. There are new indices coming online in a few months. The chipmorgan is set to also launch its frontier local markets index. All of this would lead to more demand, I believe. I will see positioning actually reaching new highs. Thank you. For completeness, I would mention that in one of the very liquid markets that kind of falls in terms of yields in a comparative category. And that's Turkey. We also currently monitor positioning essentially at all times highs. But in a very similar way, we also see it not disjointed compared to the fundamental. So I think a very similar theme there as well. And that brings us to the end of this JP Morgan at any rate emerging market focus broadcast. Thanks to you, Io and Ben for joining today. And thank you all for listening. And we hope to have you back again with us for the next one. This communication is provided for information purposes only. We refer to JP Morgan research reports related to its content for more information including important disclosures. 2026 JP Morgan Chase & Company, All Rights Reserved. This episode was recorded on 20th of August, 2026.