February was an eventful month for emerging market (EM) debt, as investors navigated the various sources of economic and geopolitical turbulence. Despite the challenges, we saw a record level of sovereign issuance (US$37 billion(bn)) and resilient overall performance. Hard currency sovereign bonds posted positive returns (+1.6%) [1], led by investment-grade, while corporate bonds (+1.6%) [2] also performed well. Meanwhile, frontier sovereign bonds (+1.4%) [3] lagged somewhat, and local currency bonds (+0.7%) [4] underperformed as EM currencies weakened against the US dollar.

The month began with the looming threat of US tariffs, which led to a risk-off move in the markets. While the 10% tariffs on China were enforced, the 25% tariffs on Canada and Mexico were postponed until 4 March. President Trump also announced reciprocal tariffs and a 25% tariff on all steel and aluminium imports into the US. All this coincided with growing inflation concerns, with US CPI inflation in January showing the biggest month-on-month increase since August 2023. Despite this, the 10-year Treasury yield fell by a sizeable 32 basis points (bps) to 4.22%, the lowest level since December. This reflected mounting concerns that US growth might slow, along with a building consensus that US inflation will cool despite recent elevated readings.

Another concern for emerging markets was the announcement of a 90-day suspension of USAID (United States Agency for International Development), the main US foreign humanitarian aid agency. Additionally, towards the end of the month, the Ukrainian President and President Trump had a very heated public exchange in the Oval Office, with little agreement, including regarding any US security guarantees. Nonetheless, the hope for a ceasefire in the near future contributed to lower oil prices, with Brent crude down 4.7% over the month to US$73.18 per barrel.

Turning to performance, the JP Morgan EMBI Global Diversified index rose 1.6%, with a positive treasury return (+2.3%) that far outweighed the negative spread return (-0.7%). Among the top performers were Lebanon (+19.0%), Venezuela (+8.1%) and Ethiopia (+4.7%). Markets were pleased with the quick formation of a new government in Lebanon, which excluded Hezbollah from the cabinet, thus removing its veto power. However, Hezbollah and its allies still hold a third of the parliament, where it recently won a confidence vote. Venezuelan bonds continued to perform well in February due to the ongoing deportation agreement with the US, suggesting potentially improving relations with Washington. However, President Trump’s recent termination of Chevron's oil license in Venezuela casts some doubts on such optimism.

In local currency sovereign bonds, the JP Morgan GBI-EM Global Diversified Index (unhedged in US dollar terms) rose 0.7% in February. Mexico (+3.8%) was the top performing country, followed by Chile (+3.5%) and Peru (+3.1%). Turkey (-1.7%) was the worst performer, followed by Thailand (-1.2%) and China (-1.0%). Despite President Trump's plans to impose 25% tariffs in March, Mexico outperformed, partly due to President Sheinbaum's strategic approach, which focused on appeasement by offering concessions on some key issues. Turkish bonds underperformed owing to weaker data releases, including a higher-than-expected current account deficit in December.

Lastly, the JP Morgan CEMBI Broad Diversified (EM Corporate Index) rose 1.6%, driven mainly by the positive Treasury return (+1.6%). Unlike sovereign bonds, high-yield bonds outperformed (+1.7%) while investment-grade bonds lagged slightly (+1.4%). Regionally, Europe and Asia outperformed, while the Middle East lagged.

Country News

Political volatility has been notable in several emerging markets of late. In Serbia, the collapse of a concrete canopy at a railway station, which killed 15 people, ignited three consecutive months of student-led anti-government protests. In Rwanda, the situation worsened as M23 rebels backed by Kigali captured Bukavu, a border town in the Democratic Republic of Congo. In response to the crisis, the US imposed sanctions on a Rwandan minister and the UK halted its aid to the country. In Gaza, Hamas apparently expressed readiness to relinquish power to extend the ceasefire with Israel, but Israel's stipulation for the group to disarm has not been met.

It was a relatively quiet month for credit rating changes. Fitch downgraded Mozambique to CCC from CCC+ due to unresolved political issues and social unrest adversely affecting the fiscal position. Moody’s cut Senegal’s rating by two notches to B3, with a negative outlook due to weaker fiscal metrics. Fitch upgraded its outlook for its BB rating for Costa Rica to positive, citing robust economic growth and an improved external position. S&P downgraded Argentina’s local currency rating to SD from CCC, reflecting its limited ability to extend maturities in the local market. Lastly, Moody’s upgraded Tunisia’s rating to Caa1 from Caa2, reflecting improved external debt amortisation and stable foreign exchange reserves.

Outlook

We continue to see value in high-yield and frontier EM bonds, where spreads and yields look attractive, supported by structural reforms and continued multilateral support. That said, strong crossover demand should also support investment-grade issuance. In EM local bond markets, central banks will continue to cut rates as economies slow and inflation eases further, helped by favourable base effects.

We remain overweight in Latin America due to attractive real rates in the region. For EM corporates, credit fundamentals remain supportive and net supply is expected to stay negative as companies continue to pay down bonded debt. As global economic growth slows, we’re likely to see downward adjustments to companies’ operational performance, but leverage remains low and interest coverage healthy.

Among the key risk factors for EM bonds are a premature end to the US Federal Reserve’s easing cycle and weak EM currencies, which may curtail the capacity of central banks to cut rates. Additionally, Trumps weaponisation of tariffs could hurt EM exports. Geopolitical risks also remain, including in the Asia Pacific region, the Middle East and Russia-Ukraine.