EM Fixed Income: Taking stock amid some market consolidation

Hello and welcome to our at ND Rate Emerging Markets Focus Podcast, a place for to discuss three standard developments and key issues of focus in the emerging market fixing come as a class. Amanek Thuva, head of Emia Emanuata, Mocha Market Strategy, here at JP Morgan, and I'm joined by Ben Ramsey, head of EM Sauron Credit Strategy, and Stella Brown, our senior Latam Rate Strategy is both at JP Morgan, and so thanks for joining. Thank you. So it looks like the market has reached some sort of a bottom around the start of October, and we have had a bit of consolidation since then, with the GPIM local markets index covering about 1.3% since the start of October. Now Brazil's first strand of action has suddenly contributed to that, and we will be talking about that particular idea of the Grand Exory on the podcast a little later. Something interesting in the performance of our in October is the different mix of performance is contributing to the recovery between FX and local rates. Here today it's been primarily at the FX market that has been driving returns, and perhaps since the start of October, this looks a bit more balanced. Currencies have stabilized and recovered a little, with the GPIM FX index delivering about 0.4 positive contribution, but the recovery has been slightly larger in rates, so GPIM over yields are down about 11 basic points, most local rates markets have rallied with a latering bias. Now while there has been some consolidation in the market, it's certainly more acknowledging that the general macro and geopolitical uncertainty is still rather analysis, and we will be dwelling into some of that in this podcast. So Aneska, from what we discussed last week on this podcast, what do you think are the new elements that the market has to contend with? Is any of that changing your biases regarding trade recommendations? Right, so obviously a lot is happening, but I think to developments that end up to me that I will mention today, they're obviously not exhaustive, there's a lot more going on. The first one is that we raised about a month ago this idea that the reflationary backdrop that growth can stay very strong, despite the increases in yield, so we raised the idea that that's a balance is truly priced and maybe unsustainable in the near term. And what stands out to me over the past week is that perhaps that idea that the core yields or generally that central bank tightening, if you price more tightening, it's starting to have more impact on some of the perceptions of growth or some of the performances of the markets that rely on growth. I increasingly see that dynamic emerging in our economist writing, warning that some of the consumer spending might be more impacted, although there's still a lot of strength on the industrial production side. We've also noticed that this week we had a very strong CPI report in the US and the price act was really telling on that day where the cell phone was largely reversed, where US interest rates are just pointed to some of the what that was saying at the IMF meetings, but certainly they also pointed out to the equity market price act and kind of growth impacted growth impacting on US rates. We are seeing similar discussions happening in other markets as well, and some of the equity indices that BJP Morgan produced, that for instance, monitors that point in the rest, they've been rising over October. So one thing I would mention is that this idea that yields can start have a more impact on growth, I think, on a positive, I think, that's becoming more evident in the price action. The second thing I would mention is the energy prices that I think what we are now seeing is a lot more negative news flow from the Middle East regarding the amount of ships that are being hit, concerns on whether the flow industry can be sustained, but what particularly makes an impression on me is at least from our commodity research late last week, that I wrote it, the all-in-cost moving oil. So when we look at brand prices, it's long been our view that actually all prices are not high in real terms. They really are not. If you look at just the all-priced and its own rise, and you use any real adjustments you look at it at real levels, it's not high, it's about 2017-18 level, which were not a bad period in growth in general. We did not think all prices were particularly a problem back then. But if you look at all-in-costs with transport, which is the new information that's transpiring over the past week, actually, we're looking at all-in-costs, 130, 140 per barrel. And that in real terms is actually the levels we've previously thought at the start of the conference, that's the levels we should start to get a bit more worried about growth impact. So I think these two developments stand out to me now, in terms of how does that change our biases. The other thing I would say is that the uncertainty, it feels to us that the macro scenarios have opened up a lot more. So there is a general more macro uncertainty, and that requires a narrower portfolio fix, basically a little bit more focus on higher conviction trades, higher conviction trades, I think that's definitely one conclusion. The second one is that in that world where you are a little bit more concerned about a growth distribution, we think it's worth narrowing the portfolio to the stronger higher carry candidates. And finally, what we have argued is that the mid-conterman rate pricing could come through in some countries via switching the buyer from failures to receivers. Now let me move on to credit and to you, Ben, so I actually want to ask you a top-down question, because we have been discussing the top-down output for credit quite extensively on this podcast, but I have to go a bit more technical in ideas and credit questions. So first, the technical one, I have noted a common theme in your recent rate recommendation that is flattening bias in EM sovereign curves. Would you be able to talk through this scene? Yeah, of course, and a good thing. So on the sovereign side, we've been doing sort of regular RV updates, particularly when we were in a world where we had been sort of sticky and tight for a long period of time. And we've had some more volatility as we've discussed on this podcast lately. But in our latest RV work, we are looking at 10/30 flat nurse, and we started to look at, in particular, Indonesia, Poland, Panama, and the course of this work. I want to give a shout out to my colleague, Furi Agmed, who did a lot of work on this in terms of what we've been looking at. So yeah, the starting point here is what's happened in Treasuries. In mid-August, we've seen the Treasuries 10/30 curve flattened by about 25 basis points. But importantly, this has been a bare flattening. So 10-year yields have risen almost 50 basis points versus around 20 basis points in the 30 year. Our rate strategist led by Jay Berry see that mostly as a hawk is repricing a fed expectations rather than the sort of long end term premium shock that we had seen back in 2023. So we went back through similar treasury flattening episodes since 2010 to see what happens in the end sovereign curves in these episodes. And interestingly, EM generally hasn't flattened at the same time. It's actually roughly two-thirds of the comparable bare flattening episodes when we see that EM 10/30 is actually steepened during the treasury moves. But afterwards, the pattern has been pretty consistent. We see EM curves flatten in every measurable episode over the following month and around 80% over the following three months. So historically, EM has tended to lag the treasury flattening and pulses what we're seeing. So this time, EM has actually already flattened by almost 10 basis points. So we're a little further through that adjustment. The historical episode that looks the most similar perhaps is August, September of 2022. But subsequently, EM continued to flatten in both the one and three month horizon in that period too. So you know, what is different this time around? Perhaps the absolute level of treasury yields, you know, about five percent, you know, starting up well on, you know, high five, four percent is different level of absolute starting point in what we had seen in the past. But in any case, given this sort of consistent lag move, we are basically constructive on further flattening. This time around, we wouldn't sort of fade that we've already seen some initial flattening when we're looking at sovereign curves. and those that are screening particular steep, as I mentioned before, look like Indonesia, Poland, and Panama, where the 10s, 30s differentials are currently around 18 basis points in Indonesia, around 48 basis points in Poland, and around 33 basis points in Panama. So I guess the broader takeaway is, it's pretty straightforward, treasuries of flattened sharply, history suggests the end curves often catch up with that, but with a lag, and we think there's still some interesting curve opportunities, where that opportunity, where we basically that adjustment can run a bit further. - And then a separate question, I also know you have recently been in Venezuela meeting local stakeholders, and that's good a country that is generating a lot of interest from clients, given big changes, and that's restructuring proposal. Would you give us your top takeaways? - Yeah, of course, and that's good thanks. Certainly a lot of interest on Venezuela, certainly as you mentioned, really big changes since what happened in January of this year, and now we have an interim government there, and the US's relationship is clearly a different one, much more involved, and one where we've seen the legislative changes already taking place in terms of a new hydrocarbons law and the regulation around that, which is really looking to open up the oil sector in Venezuela and restore the potential that had been removed from the sector in the last 15, 20 years, and orient the Venezuela more towards the Western Hemisphere, more towards the US. What do you sort of notice when you're on the ground, and being here with some folks that hadn't been here in a long time or had never been here? You notice that it's a lot safer than it was, certainly, when we were coming 10 years ago. What impresses people is that there's still an important capital stock, which is here, both in terms of infrastructure and human capital, which clearly has faced a lot of, has been impacted by what happened here in terms of the last 15, 20 years. There's not been a lot of new investment, and there's been a lot of people that have left, but there's still residual capital stock, which is keeping the country going. And I think that that's impressive. So you kind of have a sense that there's something to work with here, I guess, as a starting point just in terms of the first impressions. As I mentioned, it's kind of interesting. You kind of feel that when you're on the ground, a lot of activity, hotels are full. It's obviously, you know, the kind of predominantly oil sector that you get that sense, but I think it's kind of across sectors. People are sort of scoping out what the potential could be. And I think another key takeaway here, though, is, you know, this is not necessarily going to be linear. I mean, there's still a lot of key bottlenecks. I mean, for starters, this is an unorthodox setup with the US, and there's an interim government. And the questions we get from investors, still remain around sort of, what is the timing and nature of transition? So that's an important question and one of which has to be resolved. But just in terms of, you know, more economic focused and what will matter at the end of the day for the forthcoming debt-reflecturing proposal, and this is, you know, in terms of our world, the fixed income, that's obviously the core of the interest. The bottlenecks tend to be around how quickly this recovery can take place. And constraint here is definitely the electricity sector. So there's already a deficit in terms of what Venezuela's demanding and what it can generate, and then, you know, distribute to the population and to the economy. That deficit is going to be under more strain as the economy recovers, and it's going to be a limiting factor. There's definitely a lot of work, which has gone into trying to assess electricity sector and see what needs to be done to recover it. But there's challenges that remain there. So that's an important one. And then I think another important one, and this goes almost straight to the debt-reflecturing proposal is more clarity on the macro framework. So there's still a fiscal deficit here. There's not a lot of good data about how to measure that. But we know it's large, and we have a sense it's being monetized because there's still a big inflation problem here. Although it's an economy which has sort of been partially dollarized already. So sort of what is the macro plan in terms of addressing those challenges, what is the framework going to be, and then how to understand that framework in the context of what is the authority to proposal going to be on debt sustainability. These are sort of key missing pieces. So, just to sum up, I think a lot of interest, a lot of potential, important bottlenecks, which still have to be resolved. - And let's stick a little off that for a little bit longer. We have another very interesting story in the region, and that's Brazil. Last postcast, we covered it from the sovereign credit side. But this week we have Gisela here who covered for us the OCO market angle. So a question for you Gisela, how much risk do you perceive here going into the second round of the presidential election? And especially on the right side, I would like to hear your views on the relations for Brazil rates after the rally and how are you thinking about the easing cycle there? - Yes, sure, thank you, Neshka. So Flavio also not only did significantly better than expected in the first round, relative to what Paul suggested. He led by about two percentage points, which couple with the fact that the limited candidate still did more to the right, has made him the apparent favorite getting into the October 25 roundoff. Pauli market has been reflecting these better odds, and it has moved from something around 55% chances of him winning the elections before the first round to 85% immediately after. Since then, however, we have seen some re-adjustment. Now it's around 75%, 80%. And local markets as a result have also seen more volatility. There's two main reasons behind this repricing. The first one is that second round falls have been showing tighter margins between the two candidates. And the other reason is that there's been a number of measures announced by Lula, which markets interpret as maybe improving his chances into the second round. So the base case remains that Flavio is the apparent favorite going into the second round that hasn't changed, but we always knew it would be a bumpy road and a very close election. This is a very polarised election. Markets going forward will remain laser focused and upcoming polls. They will pay attention to whether there are any prints, and they will also be looking at interviews that the candidates give and any potential debates. Peace call plans are very relevant for markets, but we don't expect any thorough details on those before the second round. In terms of rates, valuations, this has been a key concern given the very rapid rally in the aftermath of the elections. Brazil bonds rallied on average by 115 basis points the day after the first round. With the market seeing circuit breakers deteriorate, given the speed and the size of the move. There are two important factors when thinking about valuations for rates. Risk premium and monetary policy expectations. Different measures of term premium point to a significant reduction after the first round. But when you compare Brazil's premium to other countries in emerging markets, it still screens among the highest. In Brazil, however, more than in many other countries, risk premium and monetary policy are very tightly intertwined. So markets are now pricing at terminal rates that's close to 12%. But even at that level, monetary policy will still be restrictive versus most neutral rate estimates. So that leaves scope for markets to eventually rise at lower terminal rate, particularly if a virtue cycle takes hold in which in per fiscal expectations, the press inflation expectations and that supports BRL. Lower rates also mechanically help your fiscal deficit. Some estimates by the central bank, suggest that every 100 bit cut in the select rate improves the fiscal accounts by 50 basis points. So there is room for monetary repricing. We don't think this will turn into a fast and few usage in cycle, given the current global backdrop where many central banks are tightened. May one final comment. I think the performance of Brazilian local markets in 2016 can serve as a good example of how much upside the rate of structural reforms are implemented. Of course, it is a different world and fiscal metrics have worsened since then. But I think it's still useful to have this in mind as an example. So but then the spending cup was implemented along other structural reforms. And did you ultimately allow it for policy rate cuts? So there is in cycle at level seven, almost close to 100.8. 300 BAPS of free cuts and GBIM yields, rallied by around 150 BAPS from pick to try. - So indeed, very interesting market to work here. And that brings us to the end of this JP Morgan at any rate emerging markets focus broadcast. Thanks to you, Gisela 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 with regard to JP Morgan research reports related to its content for more information and coding important disclosures. 2026, JP Morgan Chasen Company all rights reserved. This episode was recorded on the 16th of October, 2026.