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.

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.

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.

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.

Emerging market monetary policy is diverging significantly. Markets now price in rate hikes for low-yielding countries like Colombia, Korea, and Czechia due to stalled disinflation. In contrast, high-yielding markets continue to offer attractive yield compression opportunities, representing the primary focus for investors in the space.

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.

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.