Insights

Emerging Market Debt Market Commentary: August 2024

Emerging market local currency bonds posted their best monthly return of the year in August, lifted in part by US dollar weakness. Along with the more favorable currency dynamic, raised market expectations of a monetary policy convergence between EM central banks and the US Federal Reserve (Fed) supported EM local bond performance in the month.

September 17, 2024

Chart of the Month: EM Local Currency Bonds Build on July Gains

Emerging market (EM) debt benefited in August from a dovish tone in messaging from US Fed Chair Jerome Powell and an improvement in the risk backdrop. Early in the month, some EM local assets had been negatively impacted by the unwinding of carry trades involving the Japanese yen, triggered by concerns around US growth and policy normalization by the Bank of Japan. However, subsequent data releases supported the likelihood of a soft landing in the US, with a weaker US dollar and lower US Treasury yields bolstering a positive EM outlook. Markets increasingly priced in the commencement of monetary easing by the Fed in September with additional cuts before the year-end that could see rates fall by more than 100 basis points (bps). Overall for the month, total returns were positive for both EM local currency and hard currency bonds. The repricing in US core rates intensified investor expectations of further rate cuts by EM central banks, pushing EM local market yields sharply lower. EM hard currency debt benefited from a decline in US benchmark Treasury yields and a notable narrowing of spreads.

In China, economic data continued (in aggregate) to surprise on the downside in August, with weaker-than-expected fixed asset investments and manufacturing surveys indicating a contraction in activity. The People’s Bank of China (PBoC) kept policy rates unchanged in August after significant easing measures were announced in July. China’s long-term benchmark yields remained near multi-decade lows amid expectations of further rate cuts. The prices of key commodities fell in August, with West Texas crude oil declining by 5.6%. This weighed on returns from some of the EM economies with a high beta towards commodity prices. In Latin America (LatAm), the Bank of Mexico lowered its benchmark interest rate to 10.75% in August, a move contrary to market expectations. In Europe, the Czech National Bank cut its key interest rate by 25bps to 4.5%, in line with market expectations. In EM Asia (ex-China), the Central Bank of Philippines surprised the market consensus in reducing its benchmark interest rate by 25bps to 6.25%.

Net flows in August were negative for both hard currency and local currency bonds, amounting to -$1.2bn and -$1.3bn, respectively. (Source: JP Morgan).

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