Weekly Bond Bulletin: Emerging markets hold steady - J.P. Morgan Asset Management

Weekly Bond Bulletin: Emerging markets hold steady

Contributor GFICC Investors

Amid a concerted pickup in risk asset performance, emerging market (EM) resilience is a particular surprise. Despite negative headlines on Russia and more, EM corporates and sovereigns are holding up well.


Although global growth remains at elevated levels overall, recent data releases show that developed markets are losing some steam. We have flagged recent softness in both hard and soft data in the eurozone, but the latest survey results in the US are also now pointing to pronounced weakness. While it’s too early to read much from the data, we think it’s more likely the trend will revert than get worse in the upcoming months. Meanwhile, data in emerging markets has remained resilient, with trade war tensions, Russia sanctions, Syria attacks, continued economic weakness in Turkey and a heavy election calendar in the emerging world failing to derail either macro momentum or investor sentiment.

Quantitative valuations

After several weak months for risk assets, we have started to see a turnaround for valuations. Both high yield (HY) and investment grade (IG) credit had a good start to the month, with spreads tightening across the board: as of 17 April, European and US HY spreads were 22 basis points (bps) and 43 bps tighter for the month, respectively, while IG credit  spreads  were also marginally narrower, by 4 bps in Europe and 7 bps in the US. Again, more surprising was the performance of emerging markets, with the sell-off in Russia looking to have had limited spillover effects on the rest of the market. EM sovereign and corporate spreads have actually tightened by 2 bps and 4 bps month to date (as of 17 April), notwithstanding the negative contributions from Russian sovereigns and corporates, which widened by 32 bps and 104 bps, respectively.

Sanctions against Russia had a limited impact on the overall EM sovereign and EM corporate indices

Source: Bloomberg, J.P. Morgan Asset Management; data as of 17 April 2018. EM corporates=JP Morgan CEMBI Broad Diversified; EM sovereigns=JP Morgan EMBI Global Diversified; Russia corporates=JP Morgan CEMBI Broad Diversified Russia Index; Russia sovereigns=JP Morgan EMBI Global Diversified Russia Index. 31 Jan=100.


Along with positive performance in April, the technical backdrop appears to have improved for fixed income investors. Our in-house fund flow monitor has recorded positive flows month to date (as of 17 April) for all fixed income sub-asset classes, with the exception of euro and sterling IG credit. Even European HY, which had seen consistent weekly outflows throughout 2018, finally witnessed inflows in the week to 13 April. On the supply side, the picture is also relatively positive, especially in emerging markets, where demand was sufficient to absorb the huge supply of more than USD 30 billion over the week (9 to 13 April). Two deals stood out: the USD 12 billion triple-tranche deal from Qatar, and a surprise USD 11 billion new issuance from Saudi Arabia, also for three different maturities. Both of these new issues performed well, as did smaller deals from Panama, Egypt, Uruguay and Montenegro. We consider this to be a strong technical signal, indicating that market demand for new deals is still strong. We do not expect the primary market to remain so busy in EM sovereign space in the near term, so we remain sanguine on the technical front overall.

What does this mean for fixed income investors?

Despite the ongoing slowdown in macro data in both Europe and US, the performance of fixed income risk asset classes in April so far looks encouraging. We think this is justified by fundamentals, with macro weakness appearing likely to be short-lived and the outlook for corporate earnings in developed and emerging markets remaining positive. Emerging markets are likely to face ongoing challenges from trade tensions, a congested election calendar, evolving stories in countries such as Turkey and Russia, and tighter financial conditions as G3 central banks shift their policies away from quantitative easing. However, for now, positive risk sentiment has helped these markets to demonstrate solid resilience to negative shocks.

About the Bond Bulletin

Each week J.P. Morgan Asset Management’s Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

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