Market review

In April, hard-currency emerging market debt (EMD) returned -2.08% [1], while local-currency EMD returned -2.14% [2]. In EM corporate debt, the total return over the month was -0.88% [3].

In hard-currency EMD, US Treasury yields had a negative impact, as 10-year yields rose by 48 basis points to 4.68%. US inflation remained sticky, resulting in hawkish central bank narratives, higher yields and, ultimately, a negative performance for EMD. We saw a series of challenging inflation reports from the US and a shift from temporary to more entrenched inflationary pressures. As a result, rate-cut expectations for the US Federal Reserve’s (Fed’s) December meeting dropped significantly.

In local-currency EMD, the sustained strength of the US dollar again weighed on foreign-exchange returns (-1.29%), as local EM bonds (-0.86%) also detracted from performance in April. In EM corporate debt, rising US Treasury yields offset the positive effect of spreads, which tightened over the month.

Outlook

April proved to be a challenging month for EMD. There was a notable increase in spreads as optimism diminished that the growth-rate gap relative to the US would narrow. The ‘Goldilocks’ scenario for EMD would combine a more aggressive rate-cutting path for the Fed with slower US growth and a weaker US dollar. The two scenarios that could lead to a more challenging environment for risk assets would be higher interest rates due to inflation remaining elevated or markedly lower bond yields due to financial stability risks.

We continue to see value in the high-yield and frontier markets due to attractive spreads and yields. However, we remain cautious where countries have challenging amortisation schedules and a significant need for market access given the higher cost of financing. For countries at risk of default, we expect continued support from multilaterals and alternative sources, which would provide ample room for spread compression and a fall in yields.