EM Fixed Income: Carry on, notwithstanding core market shifts

Emerging markets fixed income assets are navigating a complex macro environment defined by shifting U.S. rate expectations, Japanese yen volatility, and robust global growth narratives. While sovereign debt underperformed in July due to duration sensitivity and specific headwinds in Brazil, corporate credit remains resilient. A notable technical trend involves the compression of EM investment-grade spreads against U.S. high-grade bonds, driven by massive issuance from AI-focused hyperscalers. Despite this supply pressure, investors continue to differentiate between these AI-related instruments and traditional EM corporate debt. Meanwhile, currency markets face potential carry trade disruptions from Bank of Japan policy shifts. The Mexican peso appears better positioned than in 2024 due to cleaner positioning and improved fundamentals, whereas the Brazilian real remains vulnerable to political uncertainty and high long-position concentrations ahead of the October presidential elections.