An unprecedented wave of debt from U.S. AI and hyperscaler firms is creating technical pressure that pushes U.S. high-grade spreads wider. This dynamic, not EM fundamentals, is the key driver behind the narrowing premium of EM investment-grade corporate bonds over their U.S. counterparts.
Unlike in 2024, the Mexican peso (MXN) is less vulnerable to a carry trade unwind sparked by Japanese yen intervention. This is due to cleaner investor positioning and fundamental supports beyond just yield. In contrast, Brazil's real (BRL) remains fragile with very long positioning and looming political risk, making it more exposed.
The Colombian central bank's surprising decision to hold rates and announce reserve accumulation indicates it is watching the peso's rapid appreciation. However, these actions are seen as too weak to change the currency's strong upward trend, which remains supported by one of the highest carry rates in emerging markets.
The struggle of Brazilian presidential candidate Flavio Bolsonaro to secure a running mate from an allied party signals a lack of cohesion within the opposition. This political dynamic, combined with polls favoring the incumbent, sets the stage for increased volatility in Brazilian local assets as the October election nears.
The recent underperformance of emerging market sovereign debt relative to corporate debt is not just about credit fundamentals. A key technical factor is the inherently longer duration of sovereign bond indices, making them more sensitive and vulnerable to losses when the U.S. Treasury yield curve moves higher and steepens.