Insights

Emerging Market Debt Market Commentary: January 2025

February 19, 2025

Emerging markets hard currency sovereign spreads maintained the tightening trend of 2024 into January, as indicated by the JP Morgan EMBI Global Diversified Index. The compression in Investment Grade/High Yield (IG/HY) sovereign spreads was driven by the spread tightening in the lower-rated high yield segment of the benchmark, reflecting a continuation of the pattern observed last year.

Figure 1: Hard Currency Sovereign Spreads Narrow in January

Emerging market (EM) debt had a tepid start to the year with policy uncertainty from the Trump administration, a strong US dollar and some country-specific developments. Potential for US trade tariffs and policy shifts in immigration induced volatility and impacted yields across the board, although the effect was not the same everywhere. Markets found some relief following Trump’s inaugural speech, which focused more on immigration and security issues. Consequently, near-term investor concerns on tariffs partially reversed. Meanwhile, there was a slight uptick in inflation in a number of EM economies; however, real yields remained elevated and above historical averages, except in Turkey. On the geopolitical front, a ceasefire was announced in the Israel-Hamas conflict, though the implementation of the agreed terms is still ongoing. EM local and hard currency bonds posted positive returns in January. EM local bonds benefited from the strengthening of major EM currencies against the US dollar in the month, while EM hard currency debt was lifted by a combination of idiosyncratic developments, a reduction in benchmark treasury yields, and the compression in IG/HY spreads.

Factoring in the US Federal Reserve’s (Fed) policy stance in January and domestic inflation dynamics, some EM central banks revisited their monetary easing cycle timeline. A number of major EM central banks kept their respective benchmark interest rates unchanged in January, except of Indonesia, Peru and South Africa. In China, long-term benchmark yields remained near multi-decade lows. In its January fixing, the People’s Bank of China (PBoC) maintained its one-year loan prime rate and the five-year mortgage reference rate at 3.1% and 3.6%, respectively. According to the latest data, China’s GDP grew 5.4% in Q4 on a year-on-year basis, driven by a series of stimulus measures introduced through 2024. Chinese exports outperformed market expectations, with manufacturers front-loading orders in anticipation of further tariffs from the Trump administration. In India, the Reserve Bank of India (RBI) announced a series of measures in January to address tight liquidity conditions in the banking system. These measures are expected to inject around INR 1.5 trillion into the system. Net flows in January for hard currency and local currency bonds amounted to -$1.9bn and -$0.9bn, respectively. (Source: JP Morgan).

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