Insights

Emerging Market Debt Market Commentary: Q1 2025

14 April 2025

Emerging market (EM) debt commenced 2025 facing policy uncertainties from the incoming Trump administration and headwinds from a stronger US dollar. Speculation around the potential effects of US tariffs impacted EM currencies and bond yields across the board, albeit with varied magnitude. The risk backdrop partially eased following Trump’s inaugural speech in January, which focused primarily on immigration and security issues. However, trade tariffs materialized in February, with levies imposed on US imports from Mexico, Canada, and China. While the 25% tariffs on Mexico and Canada were pushed out by 30 days, a 10% tariff on Chinese imports was retained. China imposed retaliatory tariffs, export controls, and announced antitrust investigations involving US companies, exacerbating the ongoing trade tensions with the United States. The Trump administration also announced tariffs of 25% on US imports of steel and aluminum, stoking volatility in EM currencies that have a high beta towards US demand. President Trump signed an order in March to postpone tariffs on many imports from Mexico and some imports from Canada by another month but also reiterated his intentions to impose reciprocal tariffs on all trade counterparts from April 2.

Overall, EM local currency bonds posted positive returns in Q1, benefiting from weakening in US dollar as the quarter progressed. EM hard currency debt benefited from rallies in the treasury component and a few idiosyncratic developments.

There was an uptick in inflation in a number of EM economies in the first quarter, fueled by US-driven tariff dynamics and related sector-specific price pressures. However, real yields remained above long-term averages throughout the three months. Despite high real yields, most EM central banks adopted a cautious approach in relation to interest rate actions in an effort to strike a balance between tighter monetary policy and currency weakness.

Chart of the Quarter: EM Real Yields Remain Above Long-Term Average

Emerging Market Debt Commentary: Q1 2025

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