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.

Emerging market central banks' hawkish commentary while cutting rates reinforces market stability. This low volatility, in turn, gives them confidence to continue the cutting cycle. This feedback loop can make low-volatility periods surprisingly persistent, as the actions and outcomes mutually reinforce each other.

Contrary to fears of being a crowded trade, EM fixed income is significantly under-owned by global asset allocators. Since 2012, EM local bonds have seen zero net inflows, while private credit AUM grew by $2 trillion from the same starting point. This suggests substantial room for future capital allocation into the asset class.

A recent global fixed income sell-off was not triggered by a single U.S. event but by a cascade of disparate actions from central banks and data releases in smaller economies like Australia, New Zealand, and Japan. This decentralized shift is an unusual dynamic for markets, leading to dollar weakness.

While default risk exists, the more pressing problem for credit investors is a severe supply-demand imbalance. A shortage of new M&A and corporate issuance, combined with massive sideline capital (e.g., $8T in money markets), keeps spreads historically tight and makes finding attractive opportunities the main challenge.

History shows a strong correlation between extreme national debt and societal breakdown. Countries that sustain a debt-to-GDP ratio over 130% for an extended period (e.g., 18 months) tend to tear themselves apart through civil war or revolution, not external attack.

Investors often incorrectly lump all Asian credit into a high-risk bucket associated with emerging markets or distressed property. This misperception creates undervalued opportunities in high-quality liquid markets, such as Japanese financials, which offer relative value without significant incremental risk.

When countries run large, structural government deficits, their policy options become limited. Historically, this state of 'fiscal dominance' leads to the implementation of capital controls and other financial frictions to prevent capital flight and manage the currency, increasing risks for investors.

J.P. Morgan forecasts a significant divergence in Latin America for 2026. Brazil's growth is expected to slow dramatically from 2% to just 1%. In contrast, the rest of the region, which underperformed in 2025, is projected to accelerate, led primarily by a strengthening Mexican economy.