In hard-currency emerging market debt, the bulk of the positive return over the month came from the Treasury component, with the 10-year Treasury yield falling by 5 basis points (bps) over the month to 3.42%. Apart from the usual speculation regarding US policy interest rates, another area of increasing focus in the US has been the impending debt ceiling and the political consensus needed to manage this. There was a smaller positive contribution from spreads over the month, with the spread on the index tightening by a marginal 1bp.

In local-currency debt, the positive return over the month at the index level was comprised of roughly equal positive contributions from both bond returns and FX returns. The yield on the index was 6bps lower at 6.53%. In emerging market corporate debt, in addition to the positive impact from lower Treasury yields, there was also a positive contribution from spreads, which tightened by 3bps over the month.

April was a much quieter month for bond markets, with volatility subsiding considerably compared to the previous month. Wider concerns in developed country credit markets have the potential to harm emerging market debt valuations as spreads move to price in expectations of a recession. However, lowered expectations for the US Federal Funds terminal rate and less ‘US growth exceptionalism’ could benefit emerging markets. Softness in US inflation data would also provide a further boost to emerging market currencies, as US dollar strength founded on rate differentials would reverse.

China's accelerating recovery remains an upside risk, albeit with weaker positive spill over effects so far than expected. A near ‘goldilocks’ scenario for emerging market debt would be a combination of moderating Fed rate expectations, with weaker US growth and a weaker US dollar. On the other hand, the two scenarios that could lead to a more risk-off environment would be upwardly revised US interest rate expectations due to stickier US inflation and/or markedly increasing financial stability risks.

We think the current environment calls for a high degree of selectivity, with a preference for emerging market credits that are less reliant on imminent market access, which remains out of reach for many high-yield issuers. Likewise in the current environment, we prefer credits with more resilient balance sheets and largely fixed-rate debt, which should help limit their exposure to the higher cost of capital that we expect to prevail for many issuers for some time.