The following reflects the personal views of Evariste Verchere and is provided for informational purposes only. It should not be construed as investment advice.
Year-to-date, listed securities markets have exhibited unusual dynamics. While 2-year US Treasury yields have declined, the S&P 500 and gold have reached record highs. And while investors seem to be pricing in both a resilient economy and continued policy support as the US job market becomes less stable, there are no guarantees that a soft landing will materialise. Potentially emerging market turbulence could significantly shift the relationship between economic data and market behaviour. Emerging markets fixed income remains closely linked to the US economic outlook. Hard currency bonds denominated in US dollars have historically benefited from lower US Treasury rates. Despite credit spreads being near historic tights, we continue to see value relative to developed market alternatives.
Emerging market (EM) credit offers an attractive income-to-risk ratio; however, with high yield (HY) to investment grade (IG) credit spreads at historic lows, we recommend a focus on high-quality issuers. We also prefer the short end and the belly of the curve, providing some protection in the event of upward inflation surprises. Financial institution issuers are also favoured, as they are less exposed to tariffs and typically benefit from a steeper yield curve.
Given the rapidly changing economic and political landscape, long-term macroeconomic trends have become increasingly unpredictable. In constructing portfolios, we believe the emphasis should be on income generation, robust valuations, and prudent risk management. Adjusting credit quality enables investors to balance additional income with interest rate risk, which can offer downside protection in periods of economic weakness. In our view, short-term investment-grade emerging market bonds are particularly attractive as evidenced by the yields and volatility figures coming at the end of August 2025 (J.P. Morgan CEMBI Broad Diversified High-Grade Index).
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