June delivered strong returns across the board in emerging market (EM) debt. Frontier sovereign bonds led (+3.1%) [1], followed by EM local currency bonds (+2.8%) [2], EM hard currency sovereign bonds (+2.4%) [3] and EM corporate bonds (+1.4%) [4].

The main global headline was the significant escalation of tensions between Israel and Iran, who engaged in direct bombing exchanges earlier in the month. The US later became involved by bombing several Iranian nuclear sites. However, Iran’s response was measured, signalling a clear intention to refrain from escalation. US President Trump later declared a ceasefire following Iran’s limited retaliation. Oil prices fluctuated widely over the month – Brent crude surged by over 15% mid-month, peaking near USD79 per barrel, before plunging 14% to USD65 per barrel amid ceasefire hopes.

Tariff news was inevitably overshadowed by the Israel-Iran conflict. Effective 4 June, Trump announced a doubling of tariffs on steel and aluminium imports from 25% to 50%, citing national security concerns. At the same time, the administration extended a pause on certain Chinese tariffs until 31 August, signalling a dual-track strategy of pressure and negotiation. Trade talks resumed in London, where China agreed to ease restrictions on rare earths exports while the US said it would cease revoking visas of Chinese students.

Selected country news

In Colombia, its fiscal rule was suspended after it became clear the Petro administration would exceed its deficit targets. Political tensions also rose following an assassination attempt on conservative candidate Miguel Uribe Turbay, which increased the electoral focus on security issues. Mexico held its first-ever judicial elections on 1 June, with Morena-aligned candidates winning a majority of seats. Staying in Latin America, Brazil’s congress voted to overturn the government's Tax on Financial Transactions decree, which had been projected to bring BRL10-12 billion (bn) in revenues. Ecuador reached a Staff-Level Agreement with the International Monetary Fund (IMF), including a USD1bn increase in financial assistance. 

In Pakistan, the Asian Development Bank and World Bank approved USD544 million (m) in loans for the country. In Africa, Rwanda and the Democratic Republic of the Congo (DRC) signed a US-brokered peace agreement, which should end the fighting in eastern DRC. The countries also pledged to launch a regional economic integration framework. 

Near the end of the month, the IMF approved the 8th review for Ukraine under the Extended Fund Facility, disbursing USD500m for budget support. As for the Russia-Ukraine war, Russia proceeded with peace talks in Istanbul, but there was minimal progress on more substantive issues.

Ratings changes

On the ratings front, S&P downgraded Colombia’s sovereign rating from BB+ to BB with a negative outlook due to worsening fiscal metrics. Moody’s also downgraded the country’s foreign issuer rating from Baa2 to Baa3 but with a stable outlook. S&P downgraded Bolivia’s long-term foreign currency debt rating to CCC- from CCC+ due to a worsening external profile and reduced capacity to service commercial debt. The negative outlook indicates the potential risk of a downgrade over the next 6-12 months. 

Fitch upgraded Uzbekistan’s long-term foreign currency debt to BB from BB-, based on accelerated reform progress and favourable medium-term prospects. Additionally, it lifted Ghana’s long-term foreign currency debt from RD (restricted default) to B-. The ratings agency also upped Ghana’s local currency standing to B- from CCC+, while upgrading the outlook to stable to reflect normalised relations with bilateral creditors. 

Moody’s upgraded Nigeria’s sovereign rating from Caa1 to B3, citing progress on fiscal and external balances following policy reforms. However, the outlook was revised from positive to stable, given expectations that further progress could be slower. Moody’s also cut Brazil’s outlook to stable from positive given limited progress in terms of budget flexibility and establishing fiscal credibility.

Outlook

We continue to see value in the high-yield and frontier space where spreads and yields remain attractive, buoyed by structural reforms and continued multilateral support. In addition, we think a US slowdown could support a US Treasury rally, so we have reduced our underweight in investment grade. 

In EM local markets, although many rate-cutting cycles are mature, central banks will likely persist with reducing rates as economies slow and inflation benefits from favourable base effects. We remain overweight in Latin America due to attractive real interest rates in the region. 

For EM corporates, credit fundamentals remain supportive and net supply should fall as companies continue to pay down their bonded debt. As global economic growth slows, we’re likely to see downward adjustments to operational performance; however, leverage levels remain low and interest coverage healthy. 

The biggest risks include an escalating trade war, which would hurt EM exports and global growth. A US recession and a failure of the Chinese economy to rebound would weigh on commodity prices, particularly oil. Geopolitical risks also remain heightened, with no end in sight for the Ukraine war and tensions in the Middle East remaining high despite the recent Israel-Iran ceasefire.