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Emerging Market Debt Market Commentary: February 2024

Emerging market (EM) debt returns in February continued to be impacted by resilient US economic data and market repricing around the timing of when the US Fed’s first rate cut will arrive. Local currency returns were negative in the month, although the significant contribution from spread returns helped drive largely positive returns in hard currency debt. The prospect of US growth being maintained at a higher rate than previously anticipated and the ongoing strength of the US dollar weighed on investor sentiment, especially for EM local bonds. Evolving expectations around the Fed’s monetary policy stance had mixed implications for EM central banks. The monetary policy approaches of central banks in Latin America (LatAm) have increasingly decoupled from the Fed, with many having commenced cutting rates in 2023. EM central banks in the EMEA region initially lagged their LatAm counterparts, although policy divergence has narrowed with recent rate cuts in February, notably in Hungary and Czech Republic. Policy divergence was more pronounced for EM central banks in Asia, with markets pushing out the timing of rate cuts to later in the year.

In China, a weak growth outlook prevailed due to sluggishness in the property sector and a lack of meaningful growth stimulus. The economy’s medium-term growth challenges continued to be a concern leading up to the annual National People's Congress (NPC) meeting in March. The People's Bank of China (PBoC) lowered the 5-year loan prime rate (reference rate for mortgages) by 25bps to 3.95% in February in an effort to stimulate credit demand and address the property market downturn. The 1-year loan rate was retained at 3.45%, contrary to market expectations for a rate cut. The broad EM inflation outlook for 2024 was positive, as the downtrend in inflation continued despite the spike in commodity prices in February. Improvements in the macroeconomic backdrop, along with the likelihood of a US soft landing in the medium term, contributed to a narrowing of spreads in the month. The resulting compression in EM High Yield/Investment Grade (HY/IG) spreads benefited EM hard currency bonds.

Net flows in February were negative for both hard currency and local currency funds, amounting to -$2.0bn and -$0.2bn, respectively (source: JP Morgan).

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