Emerging Markets: Selectivity key as Fed path clouds – HSBC

HSBC Asset Management notes that Emerging Market local-currency bonds have delivered strong returns over the past four years, supported by credible policies and attractive real yields, but year-to-date performance has softened as US Treasury yields rose and EM-US real rate differentials narrowed. The team argues the strategic case for EM local debt remains intact, yet expects the next phase to hinge more on country selection than broad beta exposure.

EM bonds face tighter rate gap

"Emerging market (EM) local-currency bonds delivered strong returns over the past four years, helped by improving policy credibility, attractive real yields, and resilient macroeconomic backdrops."

"But year-to-date momentum has weakened. Greater uncertainty over the Federal Reserve’s policy path has contributed to higher long-dated US Treasury yields, while the gap between EM and US real interest rates has narrowed in many markets. This reduces the space for further policy easing, limiting the upside potential for EM bond performance."

"The good news is several Latin American markets, including Brazil and Mexico, entered this cycle with strong inflation-fighting credentials after tightening policy early in 2021-2022, giving their central banks greater flexibility as inflation moderates. By contrast, parts of Asia, notably Thailand and the Philippines, face a more difficult policy trade-off as inflation risks remain elevated."

"The strategic case for EM local debt remains intact, but the next phase of the cycle should reward selectivity, with future performance likely to depend more on country selection than broad exposure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)