Market review

In September, hard-currency emerging market debt (EMD)[1] returned -2.6%, while local-currency EMD[2] returned -3.37%. In EM corporate debt[3], the total return over the month was -0.78%.

In hard-currency EMD, a selloff in US Treasury bonds weighed on returns, as the 10-year US Treasury yield increased 46 basis points (bps) to 4.57%, reaching a 16-year high. As widely expected, the Federal Reserve (Fed) maintained the federal funds rate at 5.25-5.5% at its September meeting. However, Fed policymakers suggested there could be one more hike in 2023 and two fewer rate cuts than previously projected in 2024, thus conveying a hawkish message to markets. Fed Chairman Jerome Powell reinforced this in the accompanying press conference, as he commented on the surprising robustness of the labour market. This messaging contributed to a bear steepening in the US treasury curve over the month. There was also a negative impact from spreads, which widened by 9bps.

In local-currency EMD, foreign-exchange returns (-2.08%) detracted, as the US dollar continued to strengthen in September. Local EM bonds (-1.31%) also dragged on returns over the month. In EM corporate debt, rising Treasury yields led to the negative overall return, whilst spreads tightened by 9bps. 


EMD markets continued to weaken in September, as monthly returns were the worst so far in 2023. Spreads remain well below the level seen during the US regional banking crisis earlier this year, as investors continue to hope for an economic ‘soft landing’. Nevertheless, headwinds remain for EMD, with the persistently strong US dollar, driven by higher US policy rates, creating a challenging environment for EM central banks. Higher energy prices can stress the balance of payments for net energy importers. This could also hamper progress on inflation for those economies where energy-driven components constitute a large portion of the consumption basket.

The ‘Goldilocks’ scenario for EMD would combine the current expected path for US interest rates with the avoidance of an outright recession and a weaker US dollar. However, higher US interest-rate expectations and increasing financial stability risks could dampen investor sentiment and lead to a more challenging environment for risk assets. 

We believe a high level of selectivity is essential in the current market environment, and we retain a preference for EM credits that are less reliant on imminent market access. We will continue to focus on credits with strong balance sheets and largely fixed-rate debt obligations. These factors should help limit their exposure to the higher cost of capital, which is likely to prevail for many issuers for some time.

[1] As measured by the JP Morgan EMBI Global Diversified Index

[2] As measured by the JP Morgan GBI-EM Global Diversified index (unhedged in US dollar terms)

[3] As measured by the JP Morgan CEMBI Broad Diversified Index