Emerging Market Debt Market Commentary: July 2026

EMD contends with US-Iran escalation and firmer rates

Investors in emerging market debt navigated a turbulent July as markets absorbed the re-escalation of the US–Iran war alongside a firmer global rates backdrop. Performance outcomes were more varied than earlier in the year amid pressure from higher core rates. Currency dynamics were mixed, as the US dollar swung with the oil price and shifting expectations on the US Federal Reserve (Fed). Renewed hostilities disrupted energy transit through the Strait of Hormuz in the month, with Houthi attacks on Saudi shipping straining another key shipping channel in the region. Oil prices surged back toward triple digits before easing on tentative hopes of de-escalation. The volatile oil price backdrop brought the divide between oil exporters and importers back into focus, given the acute inflation risks for energy importers. Higher energy costs and persistent trade uncertainty produced a mixed backdrop by country, complicating disinflation in some markets—although credible policy frameworks continued to anchor inflation expectations. Local yields stayed elevated amid cautious policy settings. Trade policy also remained in focus, with new US tariffs on Brazil taking effect and the USMCA shifting to annual reviews.

The Fed held rates steady at its July meeting, albeit with three votes in favor of a hike. Markets continued to price in the potential of a rate hike before the end of the year as Chair Kevin Warsh maintained a focus on restoring inflation credibility. Against this backdrop, global yields remained high, with cautious EM central banks balancing inflation risks against external volatility. Bank Indonesia Governor Perry Warjiyo stepped down, while in Colombia the new administration faced early governability challenges. In Central and Eastern Europe, Romania's political gridlock kept rating risks in focus ahead of scheduled agency reviews. Argentina's sovereign backdrop strengthened as reserve accumulation exceeded this year's International Monetary Fund (IMF) target. Separately, China's late-July Politburo meeting responded to a Q2 growth slowdown with a supportive tone for the second half, but stopped short of major new stimulus—instead favoring incremental, targeted measures over broad-based easing.

On monetary policy, actions diverged. In Latin America (LatAm), central banks in Colombia and Chile left rates on hold. In Asia, Bank Indonesia kept its policy rate unchanged at 5.75%. The People's Bank of China (PBoC) left its key lending rates unchanged for a fourteenth consecutive month in July. In Europe, the National Bank of Hungary cut rates by 25 basis points (bps) to 5.75%, while Turkey held at 37%.

Fiscal trends across EM remained uneven. A record pace of hard currency sovereign issuance continued, with prospective borrowing from Gulf sovereigns tied to the US-Iran war set to add further supply. China retained ample fiscal capacity, with a substantial share of this year's approved bond-issuance quota still undeployed. By contrast, fiscal space was constrained across parts of LatAm amid heavy debt burdens. Overall, EM hard currency debt delivered negative returns in July, as a sharp back-up in US Treasury yields drove losses. EM local currency debt eked out a modest gain, supported by broad US dollar softness that lifted EM currencies, even as local bonds detracted marginally. On a net basis, investor flows into hard currency and local currency EM bonds amounted to $1.2bn and $0.7bn, respectively, in July (Source: JP Morgan).

Local Currency Market Highlights

EM local currency debt returned +0.30% (in USD terms) in July 2026, as measured by the JP Morgan GBI-EM Global Diversified Index. The foreign exchange (FX) component was the major contributor (+0.48%), supported by broad US dollar depreciation that lifted select EM currencies—currency gains were largely concentrated in select high carry and commodity-linked markets, with 11 out of the 20 currencies in the benchmark gaining against the dollar. The treasury component, which includes combined price and interest rate returns, detracted modestly. In terms of local curves, carry remained supportive through interest income (+0.51%) but was outweighed by price losses (-0.71%) as local yields moved higher. The GBI-EM GD Index yield increased by 16 bps in July. Performance across local curves was more differentiated, with reform-credible and higher-carry markets generally proving more resilient, while others experienced larger duration-driven declines. Regionally, Latin America continued to demonstrate resilience, aided by carry and selective FX strength, while Central Europe and parts of Asia delivered more mixed results.

Colombia was the best performer in July, with returns driven by a powerful currency rally alongside modest local bond gains. Contrary to market expectations of a hike, the Central Bank of Colombia held its benchmark rate unchanged at 12% and announced a program to accumulate up to USD 4 billion in reserves to temper peso strength. Elevated carry, firmer oil prices, and a market-friendly political backdrop supported inflows. The Colombian peso appreciated against the US dollar by 7.70% in July and closed at 3,155.01.

Brazil also featured among the better performers, as high carry and a resilient currency outweighed external trade pressures. New US tariffs of 25% on Brazilian goods took effect during the month, though extensive exclusions limited the impact and the government launched further subsidized-credit support for affected companies. With the next policy meeting due in early August, elevated real yields continued to attract carry-focused investors. The Brazilian real appreciated against the US dollar by 1.72% in July and closed at 5.07.

Peru was another good performer in July, aided by stable inflation, solid carry, and a steady currency. The Central Reserve Bank of Peru kept its reference rate unchanged at 4.25%, continuing to view recent inflation pressures as temporary and supply-driven. A strong external position and steady policy credibility under Governor Velarde supported sentiment. The Peruvian sol appreciated modestly against the US dollar by 0.29% in July and closed at 3.40.

Hungary was among the underperformers in July, as the broad rise in global core yields drove sizeable duration losses and the forint weakened. The National Bank of Hungary lowered its base rate by 25 bps to 5.75%, citing continued downside surprises in inflation and signaling room for further easing over the summer. With a longer-duration profile, local bonds were especially sensitive to the move higher in global yields. The Hungarian forint depreciated against the US dollar by 1.69% in July and closed at 316.60.

South Africa was another poor performer, as rising global yields weighed on its longer-duration bonds. South Africa's annual inflation increased to 5% in June, from 4.5% in May. Contrary to market expectations of a 25 bps hike, the South African Reserve Bank held its key repo rate at 7% in July. On the fiscal front, ongoing consolidation remained a support, with gross debt stabilizing near 79% of GDP and a strong June budget surplus reinforcing an improving trajectory. The South African rand depreciated against the US dollar by 0.86% in July and closed at 16.53.

Hard Currency Market Highlights

EM hard currency sovereign debt returned -1.42% (in USD terms) in July 2026, as measured by the JP Morgan EMBI Global Diversified Index, reversing recent gains amid a firmer global rates backdrop. Performance was primarily driven by a sharp back-up in US Treasury yields, with the 10-year rising roughly 27bps to around 4.73% following a Fed hold and a hotter-than-expected US inflation print. The treasury component detracted (-1.23%), while the spread component detracted marginally (-0.20%) as sovereign spreads edged modestly wider from historically tight levels. Returns were negative across the majority of the index, with duration-sensitive, higher-quality issuers lagging most. Distressed and lower rated names led performance, reflecting their lower rate sensitivity and idiosyncratic developments. The high yield sub-index outperformed investment grade by around +1.18% in July, reflecting the longer duration and greater rate sensitivity of the IG segment. The overall EMBI GD spread widened by 9bps in July.

Lebanon stood out in July, contributing 4 bps to the index return. Its USD bonds extended their rally as the Lebanese army deployed into the first southern pilot zone amid Israel's withdrawal, and improving the medium-term restructuring outlook. This built on June's US-brokered Lebanon–Israel framework—backed by the European Union's EUR 100 million package for the Lebanese Armed Forces—which had reinforced expectations of de-escalation, reform and eventual debt restructuring.

Angola was another good performer in the month, contributing 2 bps to the index return, with spread compression largely accounting for the performance outcome. As a net energy exporter, the country benefited from higher oil prices and resilient investor appetite for higher-beta exposures, aided by continued stability and engagement with the IMF. Angola’s longer-duration profile meant that the treasury component returns were muted amid the rise in global yields.

Gabon also performed well, contributing 1 bp to the index return. The standout catalyst was a successful return to international capital markets: a heavily oversubscribed USD 920 million Eurobond—drawing orders above USD 1 billion and allowing the government to upsize the deal well beyond its USD 750 million target—signaled markedly improved investor access to the country’s hard currency bonds. The seven-year issue, which extended Gabon's maturity profile, helped ease near-term refinancing concerns, even as IMF negotiations and still-high borrowing costs remained in focus.

Chile was among the underperformers in July, detracting 9 bps from the index return. As a longer-duration, higher-quality issuer, Chilean dollar bonds were exposed to the sharp increase in US Treasury yields, with the treasury component accounting for most of the decline. Sentiment was further tempered by new external bond issuance late in the month, following a legislated increase in the debt ceiling, which added to near-term supply. A downward revision to the government's 2026 growth forecast also weighed at the margin, though firmer copper prices continued to underpin the sovereign's external position.

Malaysia was the weakest performer in July, detracting 8 bps from index return. As one of the longer-duration, higher-quality names in the index, its USD sovereign bonds were highly sensitive to the rise in global yields. The underperformance came despite constructive signals in July: the sovereign priced a USD 1.5 billion global sukuk during the month at record-low spreads, drawing an order book of over USD 9.5 billion. A newly effective US Section 301 tariff was set at a relatively favorable 10%, seen as having a manageable near-term impact.