July 2026 EMD review and outlook: local markets defy bond sell-off

Renewed tensions in the Middle East pushed oil prices higher, with the Brent crude rising 23.6% to US$90.1 a barrel. Higher oil prices reignited inflation concerns globally and contributed to a more challenging backdrop for fixed income markets, particularly for duration-sensitive assets. Gold gained 1.0% during the month, as investors sought defensive assets amid heightened geopolitical uncertainty.

Against this backdrop, global bond yields climbed, weighing on EMD returns. US Treasury yields rose across the curve, with the US 10-year yield rising 27 basis point (bps) to 4.74%, reflecting concerns around inflation. Higher developed market yields created headwinds for both hard currency and local currency (LC) EMD markets during the month. However, some of this pressure was offset by a weaker US dollar, with the DXY Index declining 1.3% following the US Federal Reserve’s (Fed) decision to hold rates steady and maintain a hawkish stance.

Issuance momentum continues

Sovereign primary market activity remained robust, with issuers raising approximately US$18.6 billion (bn). Deal flow was led by Kuwait's US$6bn multi-tranche issuance across three-, five-, and 10-year maturities, alongside Malaysia's US$1.5bn dual tranche sukuk issuance. Honduras successfully placed an US$815.7 million (m) 10-year bond, with US$615.7m earmarked for refinancing the 2027 bond. Elsewhere, Hungary (€3bn), South Korea (€1.7bn), Trinidad & Tobago (US$800m), Gabon (US$920m), and Chile (€3.1bn) also tapped international markets.

Corporate primary issuances slowed to US$27bn with most activity in Asia (US$14bn), notably Korea, China and India. Middle East and Africa issuances remained resilient (US$8bn), followed by Latin America (US$2bn) and emerging Europe (US$2bn).

Hard currency sovereign debt posted negative returns, with the JP Morgan EMBI Global Diversified Index falling 1.42%. Treasury yields led the underperformance, with Treasuries detracting 1.23% while spreads detracted a further 0.20%. High yield spreads widened 6bps, reversing the compression in June while investment grade spreads also widened a further 9bps. At the country level, Lebanon (+7.95%) led performance as progress on a US-brokered deal with Israel advanced, followed by Mozambique (+3.73%) and Gabon (+3.48%). Malaysia was the weakest performer in the Index, declining 3.08% over the month.

Local currency debt delivered positive returns in July, with the JP Morgan GBI-EM Global Diversified Index (unhedged, US dollar terms) gaining 0.30%. Foreign exchange (FX) drove returns, contributing +0.48%, partially offset by a -0.18% return from local rates. The Dominican Republic was the strongest performer in LC terms, up 2.37%, while Colombia outperformed in US dollar terms, returning 9.74% as COP strength boosted FX returns. Hungary was the weakest performer, falling 1.69% in LC terms, as rising bond yields led to a repricing of forint-denominated bonds following their strong year-to-date performance.

Emerging market corporates also posted negative returns in the month, with the JP Morgan CEMBI Broad Diversified Index down 0.48%. Performance was primarily driven by higher Treasury spreads detracting 0.61%, partially offset by positive spread returns of 0.13%. Underperformance was concentrated in investment grade issuers, which fell 0.80%, compared to a drop of 0.03% for high yield names.

Corporate movers

Aegea Finance outperformed after shareholders approved capital strengthening measures, boosting investor confidence and driving spreads tighter. Kosmos Energy also delivered strong performance, supported by a favourable operational update that underscored solid production levels in Ghana and ongoing balance-sheet improvement following the sale of its Equatorial Guinea assets.

Country stories worth watching

The International Monetary Fund (IMF) completed the seventh review of Egypt's Extended Fund Facility programme, approving approximately US$1.8bn of additional financing and bringing total disbursements under the programme to around $7.3bn. The review highlighted Egypt's continued progress on economic reforms despite the challenging regional backdrop.

Bolivia reached a staff-level agreement with the IMF on a US$1.9bn programme, which could help unlock more than US$5bn in additional multilateral financing. The programme is intended to stabilise the economy, rebuild international reserves and address mounting external imbalances. The agreement represented a significant policy shift and reduced near-term funding concerns, although implementation risks remain elevated.

Political tensions in Senegal increased after President Faye launched a new political party, formalising a split with former Prime Minister Ousmane Sonko and the PASTEF movement. The development comes at a sensitive time, as the authorities seek to address fiscal challenges and advance discussions with the IMF on a programme.

In Gabon, investors focused on the fiscal position after the government revised the 2026 budget, widening the projected deficit and increasing planned external borrowing, raising questions around the timing of a potential IMF programme. However, sentiment improved later in the month as Gabon successfully returned to the market, issuing a well received US$920m 7-year bond at 9.375% coupon. Gabon was also supported by progress made on its public debt audit ahead of IMF discussions. Despite elevated debt levels, sentiment improved on expectations that the audit could identify overstated or poorly documented liabilities, potentially resulting in lower reported debt.

The Central Bank of Turkey maintained its policy rate at 37%, citing ongoing inflation risks, geopolitical uncertainty and higher energy prices. The decision reinforces the commitment of authorities to a restrictive monetary stance despite weaker domestic activity. Continued policy discipline remains central to Turkey's ongoing stabilisation efforts.

Argentina was upgraded by Moody’s to B3 from Caa1, with the outlook revised to positive, as the Milei administration’s stabilisation programme continued to deliver fiscal adjustment, lower inflation and improving external accounts. The S&P also upgraded Pakistan to B from B-, with a stable outlook, supported by stronger IMF reform implementation, higher FX reserves and faster fiscal consolidation. 

In Brazil, fiscal developments remained a key focus, as the government reduced spending restrictions after revising down mandatory expenditure forecasts. Despite weaker-than-expected dividend tax revenues, officials have maintained confidence in meeting fiscal targets and raised the projections for the primary balance.

Outlook – constructive with risks

We continue to see value in EM hard currency debt, particularly across high yield and frontier issuers. Credit fundamentals have improved, with declining default risk as most high yield issuers have regained market access and rating trajectories remain broadly positive. While spreads are relatively tight, our base case assumes limited further compression. Frontier markets continue to benefit from restored access to external financing for most issuers, while elevated headline yields provide a cushion against downside risks, particularly for energy-linked credits.

In EM local markets, real yields remain attractive relative to developed markets, while FX volatility has fallen to historically low levels. Against this backdrop, EM corporates continue to exhibit resilient credit fundamentals, supported by conservative leverage, healthy interest coverage and historically low default rates. Technical conditions also remain favourable, with constrained net supply reflecting the continued focus of issuers on balance sheet discipline and debt reduction. This combination of solid fundamentals and supportive market technicals leaves EM corporates well positioned, with attractive carry continuing to underpin the risk-adjusted return profile.

The key risk to this constructive outlook is a prolonged conflict in the Middle East, particularly if tensions continue to escalate and trigger a broader risk-off move across global markets. Elsewhere, concerns surrounding developed market fiscal sustainability could place upward pressure on global yields, tightening financial conditions and increasing refinancing costs for lower-rated issuers.

Ongoing uncertainty around US trade, foreign and monetary policy also remains a source of volatility for EM assets. Meanwhile, a significant correction in developed market risk assets could weigh on investor sentiment and lead to a repricing of EM risk premia. In addition, El Niño-related weather disruptions could weigh on growth and add to inflationary pressures. These risks may be compounded if inflation proves more persistent than expected, raising the likelihood of a Fed rate hike, keeping global interest rates higher for longer.