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.

The core of J.P. Morgan's repayment risk analysis is a "reserve burn" stress test. It conservatively assumes vulnerable countries are completely shut out of international bond markets. This forces a reliance on existing reserves and other financing, providing a stark measure of their true financial buffers and resilience against market shocks.

Unlike previous years dominated by a single theme, 2026 will require a more nuanced approach. Performance will be driven by a range of factors including country-specific fiscal dynamics, the end of rate-cutting cycles, election outcomes, and beneficiaries of AI capex. Investors must move from a single macro view to a multi-factor differentiation strategy.

The surge in emerging market sovereign debt isn't uniform. It's heavily influenced by specific situations, such as Mexico issuing massive debt to back its state oil company, Pemex. Additionally, a notable increase in issuance from lower-rated 'Single B' sovereigns indicates renewed market access for riskier credits.

For nations facing acute liquidity stress, such as Maldives with its large 2026 bond maturity, traditional economic analysis is insufficient. The key mitigating factor is the expectation of "extraordinary bilateral support" from allied nations. This geopolitical safety net is crucial for bridging financing gaps where reserves alone would fail.

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.

Despite compressed spreads and improved market access, credit markets are not complacent. Pricing for the most vulnerable emerging market sovereigns still implies a significant 17% near-term and 40% five-year probability of default. This is well above historical averages, signaling lingering investor caution and skepticism about long-term stability.

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.

The positive outlook on Emerging Markets is backed by tangible upward revisions to economic forecasts. J.P. Morgan has increased its growth projections for the Euro area and China, supported by strong PMI data and surprisingly robust Asian exports, which indicates a strengthening global cyclical environment favorable for the asset class.