Emerging market credit spreads are tightening while developed markets' are widening. This divergence is not a fundamental mispricing but is explained by unique, positive developments in specific sovereigns like post-election Argentina and bonds in Venezuela on hopes of restructuring.

While most Latam rates are well-positioned, Peru is an outlier. The country's bonds appear expensive, treasury spreads are near historic lows, and foreign ownership is close to 50% of the total stock. This combination creates heightened risk for a pronounced sell-off, similar to its 200 bps underperformance in 2021.

Despite a packed calendar of central bank decisions and key data releases, broad FX volatility is hovering near five-year lows. This suggests investors are underpricing potential market moves, and current options pricing for events like U.S. payrolls may be insufficient to cover a significant data surprise.

Brazil's next election presents a major catalyst. An opposition win would likely unlock pent-up investment and allow high real interest rates to fall, creating a virtuous cycle. Conversely, a win for the incumbent party would likely keep rates higher for longer, suppressing growth and investment.

Regardless of the national deficit, expect more fiscal stimulus as politicians prioritize winning elections. The need to address voter concerns about 'affordability' ahead of midterms will drive spending, creating a 'run it hot' environment favorable to hard assets.

With the exception of Brazil's BRL, investor positioning in Latam currencies is not over-extended. This means the magnitude of currency moves should be similar in either a government continuity or transition scenario, creating a balanced risk profile rather than a one-sided vulnerability to a specific political outcome.

Despite political polarization, FX volatility is expected to be less than half of the 20% depreciation seen in the last cycle. This is due to a less tense social fabric, more moderate economic agendas, and strong institutions that have proven effective at limiting executive power and radical reforms.

While overall EM credit spreads are near post-GFC tights, making value scarce, Argentina stands out. Following positive legislative election results, its sovereign debt has rallied significantly but remains wide compared to its own history and peer countries, suggesting substantial room for further performance in an otherwise expensive market.

Unlike the 2021-22 cycle which coincided with post-COVID overheating, Latam economies now boast a more resilient backdrop with lower current account deficits, positive real policy rates, and moderated inflation. This strength, coupled with appealing valuations, provides a substantial cushion against political volatility for local rates markets.