Emerging Market Debt Market Commentary: July 2023

The second half of 2023 began on a positive note for emerging market (EM) debt amid global disinflation and tightening credit spreads. The regional inflation prints for June were softer than expected across the board. Despite a few inflation data surprises, real yields in most EM economies remained on an upward trajectory. Having been ahead of their developed market (DM) counterparts in the monetary tightening cycle, EM central banks (especially in the Latin America region) are increasingly expected to commence rate cuts later in 2023. In contrast, the US Federal Reserve raised rates by another 25 basis points (bps) in July. However, rising demand for duration within EM local bonds was reflective of investor expectations that a hawkish Fed has a lesser impact on emerging markets.

EM local bond yields were resilient throughout the month, despite the fluctuations in US Treasury yields and markets pricing in the probability of a US soft economic landing. In China, weaker-than-expected GDP data for Q2 added to policymakers’ determination to bolster the economy with initiatives to improve consumption. In the Politburo meeting in July, new policy measures were announced in the interest of stabilizing the economy, real estate sector, and the local currency yuan. The contagion risks from a Chinese slowdown, however, were considered limited and did not materially detract from overall EM performance in the month. Oil prices rallied in July, fueled by signs of tightening global supply and growing demand. This contributed to a favorable backdrop for outperformance by some EM economies in LatAm that have a higher beta to commodity prices.

The prospect of narrowing spreads bolstered investor sentiment in July, supporting inflows towards hard currency bonds – this followed a series of monthly outflows. Net flows in July for hard currency and local currency funds were +0.5bn and -0.5bn, respectively (source: JP Morgan).