September 2026 EMD review and outlook: caught in the global rates crosswind

Firmer inflation, robust consumption, and strong business activity supported the US Federal Reserve's (Fed) 25 basis point (bps) rate hike to 3.75-4.00%. Treasuries sold off, with the 10-year yield rising 54bps to 5.29%, its highest level since 2007, while the DXY gained 2.0%. Meanwhile, tensions in the Middle East kept energy prices elevated, with Brent crude ending the month 14% higher at $103.5 a barrel.

The combination of higher US yields and dollar strength weighed on emerging market debt. Local currency bonds were affected, as currency weakness eroded the carry cushion. Central and Eastern European markets came under pressure on both the foreign exchange (FX) and duration fronts, as European government bond yields followed US Treasury yields higher. Hard currency bonds were the weakest segment, with losses driven primarily by duration as longer-dated bonds underperformed.

Sovereign issuance was relatively subdued in September amid volatile US rates, with issuance of US$16.6 billion versus US$44.2 billion in September 2025 and a 10-year September average of US$17.3 billion. Corporate issuance reached US$48 billion, led by resilient CEEMEA (Central and Eastern Europe, the Middle East, and Africa) supply, while Asia and Latin America remained below their five-year averages.

A tough month on the markets 

Hard currency sovereign debt posted negative returns in September, with the JP Morgan EMBI Global Diversified Index returning -3.34%. Price returns drove the decline, detracting 3.86%, while interest returns positively contributed 0.54%. High yield underperformed, returning -3.42% and ending the month at a spread of 283bps, while investment grade returned -3.24%, with spreads finishing at 102bps. At the country level, Lebanon (+4.15%) led performance, followed by Senegal (+2.80%), which honoured its 13 September Eurobond coupon despite launching an IMF-backed debt restructuring, and Mozambique (+2.50%). Ukraine (-6.63%) was the weakest performer in the Index, followed by Ecuador (-6.23%), where bonds sold off after President Noboa unexpectedly replaced the finance minister.

In local currency (LC) markets, the JP Morgan GBI-EM Global Diversified Index (unhedged, US dollar terms) fell -2.12%. FX was the primary driver of losses, detracting 1.79%, while local rates detracted a further 0.34%. Brazil was the strongest performer in both LC and US dollar terms, returning 2.35% and 2.50% respectively, as the central bank cut the Selic by 25bps to 13.75%, its fifth consecutive cut. Mexico was the weakest performer, returning -6.19% in US dollar terms, as the peso depreciated by over 6% after the central bank held rates at 6.50% while the Fed hiked.

Emerging market (EM) corporate returns were negative, with the JP Morgan CEMBI Broad Diversified Index returning -1.96%, driven primarily by price returns of -2.48%, while interest returns contributed +0.53%. High yield corporates marginally outperformed, returning -1.91% with spreads ending the month at 306bps, while investment grade corporates returned -1.99%, with spreads finishing at 102bps. Regionally, Asia (-1.43%) was the most resilient, supported by its shorter duration profile, with Korea (-0.86%) and Singapore (-0.85%) among the stronger markets. Latin America (-2.51%) underperformed as Colombia (-3.12%) and Mexico (-2.94%) sold off.

Eastern and Southern African Trade and Development Bank (TDB) and NCB Financial Group outperformed on credit-positive developments. TDB benefited from an oversubscribed US$800 million syndicated loan and Fitch's BB affirmation, while NCB advanced its group reorganisation to strengthen capital and confirmed leadership succession.

Country news

Senegal. Authorities reached a staff-level agreement with the IMF on a US$2.2 billion programme. However, the agreement remains contingent on creditor financing assurances and corrective measures to address past debt misreporting. Meanwhile, S&P downgraded the sovereign, citing elevated distressed exchange risks, while the supplementary budget highlighted a wider fiscal deficit and weaker growth outlook.

Bolivia. Congress approved a US$1.9 billion IMF Extended Fund Facility, which authorities expect will help unlock additional multilateral financing. The removal of diesel subsidies subsequently raised concerns over potential social unrest.

Brazil. Markets rallied as investors increasingly priced Bolsonaro’s improving electoral prospects, with momentum building ahead of the October first round. The central bank also cut the Selic rate by 25bps to 13.75%, taking cumulative easing to 125bps from the 15% peak.

Colombia. The central bank unexpectedly raised interest rates by 25bps to 12.25% as inflation continued to accelerate. Fiscal concerns also remained in focus after authorities requested an earlier IMF Article IV review, while the medium-term fiscal trajectory continued to weigh on sentiment.

Mexico. Policymakers left rates unchanged at 6.50% for a third consecutive meeting. Although core inflation continued to moderate, headline inflation moved higher and the peso weakened sharply during the month, underperforming most emerging market currencies.

Romania. Political uncertainty increased after a second attempt to form a government failed. The development raised concerns over fiscal policy implementation and the medium-term outlook for Romania’s investment-grade rating.

South Africa. The reserve bank raised its policy rate by 25bps to 7.25%, citing persistent inflationary pressures linked to higher global energy prices. The decision came despite weaker growth expectations and a contraction in second-quarter GDP.

Sri Lanka. Fitch upgraded the sovereign to B- from CCC+, reflecting progress on fiscal reforms, improved external financing conditions and continued debt reduction. Nevertheless, debt-servicing costs remain elevated relative to rating peers.

Mozambique. Moody's downgraded the sovereign to Caa3 from Caa2, citing increased restructuring risks and continued external financing pressures. Discussions with the IMF continued during the month as authorities explored a potential new programme.

Nigeria. The central bank lowered the policy rate by 350bps to 23%, framing the move as an operational reset to improve monetary policy transmission rather than a shift in its underlying stance. The decision came against a backdrop of easing inflation and improving macroeconomic conditions.

Outlook – constructive but cautious 

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. 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. 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 keep global energy prices elevated for the foreseeable future. Elsewhere, developed market fiscal sustainability could continue to 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, while 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. With the Fed having raised rates in September and signalling further tightening, these risks may be compounded as global interest rates remain higher for longer.