Market review

In February 2023, hard-currency emerging market debt1 returned -2.21%, while local-currency emerging market debt23

In hard-currency emerging market debt, there was a big negative impetus from US treasury yields, with the 10-year treasury yield rising by 41 basis points (bps) over the month to 3.92%. The key driver of this was the unexpected strength of US economic data, which led to a sharp upward repricing of US policy rate expectations. Of particular note, the most impactful data was the US jobs report, which showed that non-farm payrolls surged by 517,000 in January, versus consensus expectations of 189,000. As a result, the US unemployment rate fell to a 53-year low of 3.4%. Spreads also moved unhelpfully for hard-currency emerging market debt, albeit relatively marginally, with a small widening of 3bps over the month.

In local currency debt, there was a sizeable negative impact over the month from FX, as emerging market currencies were negatively impacted by US dollar strength over the period. In turn, this was largely the result of the aforementioned upward re-evaluation of policy rate expectations. Although smaller than the FX contribution, there was also a negative contribution from bond returns. In emerging market corporate bonds, by far the biggest negative driver over the month was the big increase in US treasury yields.


Given the weakness of last month, we think that pockets of value in emerging market debt have increased. However, higher risk-free interest rates and thus reduced yield differentials mean that being selective remains imperative. While nervousness about the global growth outlook remains, there are several supportive factors that are potential tailwinds for this year, including China’s reopening, the more benign European energy market situation, and the prospect of the US Federal Reserve engineering a ‘soft landing’. If US inflation data proves to be less sticky, this would likely lead to amended US policy interest rate expectations, which could be supportive for emerging market currencies.

Since global food and energy prices have peaked, we believe that inflation should continue decelerating in 2023, and we have begun to see some emerging market central banks potentially paving the way for policy interest rate cuts. Brazil and Chile are leading the way in this regard.

  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