Despite US Treasury curve steepening, EM curves have steepened less. This relative resilience stems from a structural shift towards greater reliance on domestic funding sources and stronger current account positions, making them less vulnerable to global funding competition.
Contrary to common heuristics, recent market action shows the US 10-year real yield has a more significant and consistent impact on EMFX than oil prices. Even as oil rose, the easing in US real yields provided a stronger positive influence on EM currencies, demonstrating its relative importance.
Despite a massive increase in debt issuance from AI hyperscalers, the impact on EM sovereign credit is minimal. The investor bases are largely segmented, as dedicated EM investors and local buyers cannot easily substitute sovereign exposure with US corporate paper, limiting direct competition for funds.
Heavy investment in frontier markets is driven by a fundamental change in policymaker behavior. Central banks have adopted more orthodox FX and monetary policies and have resisted imposing capital controls during volatility, boosting investor confidence and attracting capital beyond the simple appeal of high yields.