Skip to main content

Emerging Market Debt Market Commentary: Q3 2023

The quarter began on a positive note for emerging market (EM) debt amid global disinflation and tightening credit spreads. Real yields in most EM economies remained on an upward trajectory through the period. Rising demand for duration earlier in the period within EM local markets was reflective of investor expectations that a hawkish Federal Reserve (Fed) has comparatively less of an impact on emerging markets. However, EM assets were subject to weaker risk sentiment in August, despite softening inflation prints across the board, as US Treasury yields surged and negative growth headlines emerged from China. EM inflationary pressures were back in focus with the supply-driven rally in oil prices driving prices up by 28.52% in the quarter (as shown in Figure 4). In September, repricing in core US rates, increased term premiums, and the rally in oil prices ensured that EMD performance in the quarter was negative.

Growth data released in China highlighted the real estate sector’s drag on the economic recovery. The need for targeted policy measures by the Politburo was magnified by slower-than-expected consumption recovery. In an effort to bolster the shaky economy, the People's Bank of China (PBoC) lowered its one-year loan prime rate (LPR) by 10bps to 3.45% in August, which is a record low. The lending rates were maintained in September, as PBoC assessed the impact of the earlier rate cut. Economic momentum in China improved in August and September from a lower base observed early in Q3. Liquidity conditions in China improved further in September, with the PBoC announcing a 25bps cut in the Reserve Requirement Ratio (RRR).

A strong US dollar, the markets’ reassessment of the Fed’s policy approach, and the cascading effects from China’s uncertain growth prospects weighed on the flows towards EM assets. Net flows during the quarter for hard currency and local currency funds amounted to-$10.6bn and -$4.5bn, respectively. (Source: JP Morgan).

More on Emerging Market Debt