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Emerging Market Debt Market Commentary: May 2024

June 12, 2024

Emerging market (EM) debt benefited from improved macro fundamentals, backed by the US Federal Reserve’s meeting outcome on May 1. The Fed’s policy rate was retained at the 5.25%-to-5.50% range, acknowledging resilient US economic activity and a softer if still high inflation print. Despite the Fed’s data dependence, the possibility of lower rates followed by lower inflation and healthy economic activity were supportive of EM bond markets. The broad EM inflation outlook largely remained positive, bolstered by easing commodity prices. Against this backdrop, investor risk sentiment towards EM assets improved in May. The political backdrop remained uncertain, with Israel’s operations in Rafah and elections in India, Mexico, and South Africa. Total returns were positive in May for both EM local currency and hard currency bonds. A partial reversal of US dollar strength in May and a downtrend in US Treasury yields aided EM local bonds. EM hard currency debt benefited from a reduction in risk-off sentiment and rallies in dollar bond markets.

On the monetary policy front, central bank rate cuts were delivered in Latin America (LatAm), Europe and Asia. The Central Bank of Chile reduced its benchmark interest rate by 50 basis points (bps) to 6.5% in May. In Europe, Hungary and Czech Republic each lowered their policy rates by 50bps to 7.25% and 5.25%, respectively. Turkey continued to be an outlier, maintaining its record high key one-week repo auction rate of 50% as the central bank continued to combat remarkably high inflation and the spillover effects from ongoing uncertainty in the geopolitical landscape. However, central banks in EM Asia (ex-China) continued to be cautious, with the Bank of Indonesia and the Central Bank of Malaysia keeping interest rates at 6.25% and 3.0%, respectively. In China, the government relaxed home buying restrictions and reduced down payment ratios to support the prevailing sluggishness in its housing market. The People's Bank of China (PBoC) kept key lending rates unchanged in May, in line with market expectations. The 1-year loan prime rate, the benchmark rate for corporate and household loans, was retained at 3.45%. The 5-year rate, the reference rate for mortgages, was maintained at 3.95%.

Net flows in May were negative for both hard currency and local currency bonds, amounting to -$0.6bn and -$1.7bn respectively. (Source: JP Morgan).

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