Generally, perceived higher risk segments outperformed more defensive areas of the market, with frontier bonds returning 2.0% [1], hard currency sovereign bonds returning 1.4% [2] and EM corporate bonds returning 0.8% [3]. Local currency bonds (up 2.1%) [4] were the top performers, as EM currencies were helped by a weaker US dollar.

A key theme affecting market performance over the month was the tariff polices of the incoming Trump administration. While significant uncertainties remain, and with more announcements still to come, the initial assessment of new US tariffs was that they were less aggressive than they could have been. In particular, the new 10% tariff on Chinese imports was seen as a manageable outcome for China, while the 25% tariffs announced for Mexico and Canada were also subsequently delayed.

On the US inflation front, concerns about the potential adverse impact of US tariff policies, together with rising oil prices, pushed the US 10-year US Treasury yield to as high as 4.79%. However, the US inflation reading for December was lower than expected which, together with the relatively soft roll-out of tariffs (so far), meant the 10-year US Treasury yield ended the month 3 basis points (bps) lower at 4.54%.

In terms of performance, the JP Morgan EMBI Global Diversified Index (hard currency sovereign bonds) rose 1.4%, supported by a positive Treasury return (+0.6%) and positive spread return (0.9%). Among the top performers in January were Lebanon (+23.3%), Venezuela (+18.9%) and Ecuador (+14.6%). In Lebanon, the US-backed candidate Joseph Aoun was elected as the country’s first president in more than two years. This was seen as representing a shift away from Iranian influence and potentially helpful for stability in the crisis-hit nation. The rally in Lebanon's financial markets also had the effect of making Venezuela’s debt appear comparatively cheap, especially since both countries' debts trade at similar levels. At the other end of the table, Rwanda (-1.6%) was the worst performer after Kigali-backed rebels took control of an eastern city in the Democratic Republic of Congo. This was seen as raising the prospect of a full-blown war that could endanger financing flows to Rwanda.

In local currency sovereign bonds, the JP Morgan GBI-EM Global Diversified Index (unhedged in US dollar terms) rose 2.1% in January. Latin America (+5.0%) was the top performing region, driven by strong performances in Brazil (+9.2%) and Colombia (+7.7%). The Brazilian real was the top performing currency after the central bank hiked rates by another 1% to 13.25% to tackle inflation. Turkey (+6.7%) was also among the top performers, after inflation fell by more than expected and the central bank continued its rate-cutting cycle. Meanwhile, Asia (+0.6%) was the worst performing region due to weakness in Indonesia (-0.5%) and India (-0.3%). The Indonesian central bank’s surprise interest rate cut in the month was aimed at bolstering economic growth. However it also had a negative impact on rupiah, which ended the month as one of the worst performing EM currencies.

Lastly, the JP Morgan CEMBI Broad Diversified Index (the index for EM corporate bonds) rose 0.8% due to both a positive treasury return (+0.5%) and positive spread return (+0.3%). Similarly to sovereign bonds, High Yield bonds outperformed (+1.0%) while Investment Grade bonds lagged (+0.6%). Regionally, Latin America and Europe outperformed, whilst Asia and the Middle East lagged.

Selected country developments

On the political front, President Nicolas Maduro was sworn in for a third term in Venezuela after he claimed victory in the highly contested elections in July. He is widely accused of stealing the vote and the opposition have vowed to boycott the parliamentary and regional elections scheduled for 27 April. Gabon announced presidential elections which will be held on 12 April. Meanwhile, Mozambique is reportedly considering restructuring its public debt due to lost revenues that are apparently the result of post-election unrest.

Sovereign rating upgrades exceeded downgrades once again in January, in a continuation of the trend we have seen since mid-2023. Fitch upgraded El Salvador to B- from CCC+, reflecting easing financing constraints and reduced financing needs, supported by regaining market access and the country’s recently announced IMF programme. Moody’s upgraded Argentina’s rating to Caa3 from Ca, and raised the outlook to Positive from Stable. This was owing to the government’s forceful policy shifts that are helping to address economic imbalances and decreasing the likelihood of a credit event. S&P affirmed Paraguay’s rating at BB+, one level below Investment Grade, while revising the outlook to Positive from Stable. On the negative side, Fitch downgraded Bolivia to CCC- from CCC, reflecting dwindling foreign exchange availability and ineffective policies.

Outlook

We continue to see value in High Yield and frontier EM bonds, where spreads and yields look attractive, supported by structural reforms and continued multilateral support. That said, strong crossover demand should also support Investment Grade issuance. In EM local bond markets, central banks will continue to cut rates as economies slow and inflation continues easing, helped by favourable base effects.

We remain overweight in Latin America due to attractive real rates in the region. For EM corporates, credit fundamentals remain supportive and net supply is expected to remain negative as companies continue to pay down bonded debt. As global economic growth slows, we are likely to see downward adjustments to companies’ operational performance, but leverage remains low and interest coverage healthy.

Among the key risk factors for the EM bonds are a premature end to the Federal Reserve’s easing cycle and weak EM currencies, which may curtail the capacity of central banks to cut rates. Additionally, the weaponisation of tariffs by the Trump administration could hurt EM exports. Geopolitical risks also remain, including in the Asia Pacific region where North Korea and China might try to test the new Trump administration’s resolve. Ongoing conflicts in the Middle East and Russia-Ukraine continue to contribute to global instability.