Insights

Emerging Market Debt Market Commentary: January 2026

Emerging market (EM) debt maintained the momentum developed through 2025 into the first month of 2026. The inflation environment continued to turn more favorable across most economies, which has allowed central banks to maintain or extend rate‑cut cycles. Furthermore, EM growth differentials versus developed markets remained positive, and global liquidity conditions remain accommodative. While the macro backdrop continued to be largely favorable, sensitivity to US rates and geopolitical headlines remains. Indeed, geopolitical developments were key drivers of volatility in January.

18 February 2026

EM hard currency debt posted modestly positive returns, driven by idiosyncratic developments and sovereign spread compression to multi-year lows. For EM local currency debt, the weakening in the US dollar and high real yield provided support in the month. That said, the local currency gains achieved earlier in the month were partially reversed later amid a pickup in global risk aversion. This was partly fueled by an escalation in US–Iran tensions as the US ramped up rhetoric around potential US military action. Combined with renewed sanctions threats, this refocused markets on the vulnerability of Middle East energy infrastructure, with crude oil prices reacting to hit multi‑month highs. For EMD, this translated into relative outperformance of oil‑exporting economies, while oil‑importing EM countries had to deal with the potential of higher inflation feeding into their economies.

Perhaps the biggest geopolitical development in the month centered on Venezuela, where US forces captured President Nicolás Maduro and removed him to a New York prison. The impact itself was largely contained to Venezuela, with the subsequent partial easing and redesign of oil sanctions allowing US-controlled Venezuelan crude exports. Venezuelan bonds rallied on prospects for increased oil revenues and the potential for debt restructuring. The US–Greenland dispute arguably had a more systemic impact, with the US resurfacing tariff threats against its European allies. This triggered a brief risk‑off move, which pressured EM currencies for a time as investors targeted assets perceived to have greater ‘safe haven’ status.

For EM local currency debt, currency appreciation was the primary driver of returns in January, contributing approximately +1.4% to overall performance; 15 of the 20 currencies in the index strengthened against the greenback. However, as the chart below shows, India and Turkey FX returns lagged peers amid country‑specific headwinds.

Learn more about what drove emerging market debt returns in January 2026.

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