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Emerging Market Debt Market Commentary: April 2024

Emerging market (EM) debt faced headwinds in April from market repricing of core rates, geopolitical tensions, and a surge in commodity prices. A market narrative built on the possibility of the US Federal Reserve ( Fed) maintaining high rates for longer than was anticipated at the end of 2023 continued to weigh on investor risk sentiment. As a result, sentiment toward EM assets weakened a little in the latter part of the month amid a decline in oil prices and reduced volatility in core rates. The broad EM inflation outlook largely remained unchanged, despite a recent slowdown in the pace of EM disinflation. Real yields remained in positive territory for most EM economies. Total returns were negative in April for both EM local and hard currency bonds. The prospect of the US economy continuing to grow at a stronger rate than previously forecast, alongside the ongoing strength of the US dollar, weighed on sentiment for EM local bonds, in particular. EM hard currency debt was impacted by an uptrend in bond yields and idiosyncratic developments within the EM universe.

On the monetary policy front, rate cuts continued apace in Latin America (LatAm), with the Central Bank of Chile reducing its benchmark interest rate by 75 basis points (bps) to 6.5% in April. In Europe, Hungary lowered its key base rate by 50bps to 7.75% in April. Turkey continued to be an outlier, maintaining its record high interest rate of 50% in April as the central bank continued to combat sustained high inflation within the Turkish economy. However, central banks in EM Asia (ex-China) continued to hold a relatively more hawkish view, with the Bank of Indonesia surprising markets with a 25bps rate hike in April, taking its key 7-day reverse repurchase rate to 6.25%. In China, the People's Bank of China (PBoC) left its key lending rates unchanged in April. The 1-year loan prime rate (LPR) and the 5-year rate were retained at 3.45% and 3.95%, respectively. Both reference rates are at record lows, illustrative of the PBoC’s continued efforts to fuel an economic recovery amid persisting headwinds from the troubled property sector, deflation risks, and weak trade data.

Net flows in April were positive for hard currency bonds at +$0.2bn, helped by reduced outflows. Net flows in April were however negative for local currency bonds, amounting to -$1.0bn. (Source: JP Morgan).

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