Emerging Market Debt Commentary - July 2021

Emerging market debt (in USD terms) recorded modest moves in July as worries related to regulatory crackdown in China and a recent surge in infections from the Delta variant of coronavirus were balanced by reduced expectations of the US Federal Reserve (Fed) going ahead with an earlier and more aggressive normalization of monetary policy. Spread widening in EM hard currency (HC) markets was offset by the rally in treasury yields as investors continued to look through the sharp uptick in realized inflation, considering it to be a transitory rise. EM currencies underperformed, particularly so in the Latin American (LatAm) region amid political uncertainty in some countries. Even as flows slowed down in the week of the Federal Open Market Committee (FOMC) meeting, July experienced overall positive flows of +$1.9bn and +$1.8bn into hard currency and local currency, respectively (Source for flows: Morgan Stanley).