Insights

Emerging Market Debt Market Commentary: July 2024

Markets have increasingly priced in the likelihood the US Federal Reserve (US Fed) will start cutting interest rates in September, leading to monetary policy convergence between major emerging market (EM) central banks and the US Fed in the medium term. Along with a weaker US dollar and lower US Treasury yields, this was supportive of EM debt in July.

August 20, 2024

Chart of the Month: Implied US Fed Funds Rate Shift

Emerging market (EM) debt in July benefited from tailwinds in the form of a softer US inflation print and increasing expectations of a rate cut by the US Fed in September. The improving prospects of the Fed easing monetary policy should bode well for emerging markets, since a Fed rate cut could widen the room for EM central banks in Europe and Latin America (LatAm) to cut rates further. However, there were bouts of uncertainty during June around the future trajectory of EM core rates, with markets factoring in US election outcome possibilities and prevailing geopolitical risks. While markets welcomed the reopening of Israel-Hamas talks in July, the situation remains very fragile. The broad EM inflation outlook improved in July, aided by the softening in commodity prices, especially oil, which fell by 4.5% in the month. Total returns were positive in July for both EM local currency and hard currency bonds. The US dollar weakness combined with a drop in EM local yields supported EM local bonds. EM hard currency debt benefited from a decline in US benchmark Treasury yields and rallies in some of the EM dollar bond markets.

In China, the third Plenum of the 20th CPC Central Committee concluded its four-day meeting (15-18 July) with a statement prioritizing high-quality development, digitalization of the real economy, development of the services sector, modernization of infrastructure, and enhancement of supply chain resilience. Meanwhile, the People's Bank of China (PBoC) lowered its key lending rates to record lows in July — the one-year loan prime rate, the reference rate for most corporate and household loans, was reduced by 10bps to 3.35%. The five-year rate, a reference rate for property mortgages, was also reduced by 10bps to 3.85%. In LatAm, the Central Bank of Colombia reduced its benchmark interest rate by 50bps to 10.75% in July. In Europe, Hungary’s central bank reduced its key base rate by 25bps to 6.75%. Central banks in EM Asia (ex-China) continued to be cautious, with interest rates unchanged in Philippines, Thailand, and Indonesia in July.

Net flows in July 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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