“Emerging Market Bonds Experience Sell-Off Amid Fed’s Hawkish Stance”


Over the past fortnight, emerging market bonds have faced a sell-off following Federal Reserve Chairman Jerome Powell’s indication of a hawkish stance on U.S. interest rates. Despite this, Sergey Goncharov, head of Americas fixed income at Vontobel Asset Management, notes that the average spread for emerging market hard currency sovereign paper over U.S. Treasuries remains close to its post-pandemic low at around 3.4 percentage points. This reflects a significant rally in fixed-income terms, down from 460 basis points just five months ago.

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The steady performance of emerging market bonds has led to differing perspectives among market participants. Some view them as fully priced and susceptible to further global shocks, while others consider emerging market economies stable by historical standards, with the additional yield offering value despite the risks involved. Edward Al-Hussainy, senior currency analyst at Columbia Threadneedle Investments, describes the market sentiment as divided between “spread sellers and yield buyers.”

Amidst these dynamics, professionals in the field are adjusting their portfolios by gravitating towards solid credits from countries like Mexico, Indonesia, and Saudi Arabia, while moving away from higher-yielding names. Samy Muaddi, portfolio manager for emerging market bonds at T. Rowe Price, emphasizes that they are not chasing risk in their investment strategies.

The expectation of prolonged higher interest rates by the Fed has dampened the anticipation of interest rate cuts in countries that previously tightened faster than the U.S. This shift has impacted bets on Latin American sovereigns like Brazil and Mexico. Michael Kelly, head of PineBridge Investments’ multi-asset strategy, notes their departure from such positions after a significant bond rally.

Additionally, policy reforms in countries facing credit default threats or experiencing economic challenges, such as Argentina and Ecuador, have driven unlikely fixed-income success stories in 2024. Looking ahead, further gains may be harder to achieve, as high-yield spreads have tightened notably.

Despite these challenges, emerging markets continue to offer opportunities for bond pickers. Rising commodity prices are creating value in the debt of oil exporters like Colombia and Nigeria, while bargains are seen in Asian high-yield corporate debt and specific national restructuring stories like Pakistan.

However, amidst these perceived opportunities, the overall narrative on emerging markets is shifting, with the IMF highlighting major economies like the U.S., China, the United Kingdom, and Italy as critical areas needing policy action to address imbalances. Nonetheless, the interconnected nature of global financial markets means that challenges in these economies could still reverberate across emerging markets.

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