Market review

In January, hard-currency emerging market debt (EMD) returned -1.02% [1], while local-currency EMD returned -1.52% [2]. In EM corporate debt, the total return over the month was 0.59% [3].

In hard-currency EMD, there was a negative impact from spreads, which widened by 18 basis points (bps). US Treasury yields also weighed on returns, although to a lesser extent, as the 10-year US Treasury yield rose by 3bps to 3.91% over the month. The US economy grew by 3.3% year on year on an annualised basis in the fourth quarter of 2023. The unemployment rate remained unchanged at 3.7% and annual core inflation slowed to 3.9% in December. Against this backdrop, investors began to doubt whether the US Federal Reserve (Fed) would begin cutting rates as soon as March. Elsewhere, geopolitics in the Middle East continued to dominate headlines, as attacks by Houthi rebels on commercial ships in the Red Sea were followed by retaliatory strikes from the US and UK. Fears of a broader escalation weighed on risk sentiment and led to higher oil prices.

In local-currency EMD, foreign-exchange returns (-2.13%) detracted from performance, as the US dollar strengthened against all 20 EM currencies. Conversely, local EM bonds (+0.62%) added to returns over the month. In EM corporate debt, spreads remaining flat cancelled out the negative impact of rising US Treasury yields.


EMD markets fell in January, as heightened geopolitical risks and the expectation of later rate cuts in the US weighed on sovereign bonds and risk assets more broadly. Although the probability of a US recession has decreased, the end of the US economy’s relative growth advantage could benefit EM, as the gap between EM and developed-market growth widens.

The ‘Goldilocks’ scenario for EMD would combine the current expected rate path for the Fed, resulting in weaker US growth and a softer US dollar. The two scenarios that could lead to a more challenging environment for risk assets would be higher interest rates due to inflation remaining elevated or markedly lower bond yields due to financial stability risks.

We continue to see value in high-yield and frontier markets due to attractive spreads and yields. However, we remain cautious where countries have challenging amortisation schedules and a significant need for market access given higher financing costs. For countries at risk of default, we expect continued support from multilaterals and alternative sources, which would provide ample room for spread compression and a fall in yields.


  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