Hard currency emerging market (EM) bonds delivered solid returns in July, helped by more favourable tariff news that supported overall risk sentiment. Higher-risk frontier sovereign bonds (+2.0%) [1]  outperformed broader hard currency EM sovereigns (+1.3%) [2], while EM corporate bonds (+0.9%) [3] also posted positive returns. In contrast, EM local currency bonds (-0.8%) [4] posted their first monthly loss of the year owing to US dollar strength over the period. However, this was only a small recovery compared to the broader weak dollar trend that dominated the first half of this year.

Tariffs took centre stage once again this month. President Trump initially extended the original 90-day deadline, from 9 July to 1 August. However, soon after, he unveiled a new set of ‘Liberation Day’ tariffs set to take effect on the same date. By the end of the month, the US had reached agreements with several major trading partners, including Japan, the EU and South Korea, which supported risk sentiment. During the month, President Trump also signed the One Big Beautiful Bill Act into law. This extended the 2017 tax cuts, expanded business and personal tax credits, and increased funding for border security and defence. In response to this fiscal stimulus, 10-year US Treasury yields rose by 15 basis points over the month to 4.38%, resulting in negative Treasury returns for hard currency EM bonds.

Selected country news

The US announced a new set of ‘Liberation Day’ tariffs targeting a broad range of countries. Initial rates ranged from 20% to 35% for most major Asian economies, but subsequent negotiations led to a reduced US tariff rate of 19% for Indonesia, Malaysia and the Philippines, down from 32%, 25% and 20% respectively. President Trump also imposed steep tariffs on some BRICS nations, including 30% on South Africa, 50% on Brazil and 25% on India. The particularly sharp tariff hike for Brazil was despite the US running a trade surplus with the country. As such, this was widely seen as a form of admonishment for the prosecution of Brazil’s former President Jair Bolsonaro, which Trump characterises as a political witch hunt.

Meanwhile, India’s higher tariff rate relative to most EM Asian peers was linked to its energy and defence ties with Russia, including its purchases of oil and military equipment from the country. Just ahead of the 1 August deadline, Trump extended Mexico’s existing tariff regime, which includes a 25% tariff on noncompliant USMCA (United States-Mexico-Canada Agreement) goods, for another 90 days to allow for further negotiations. Lastly, US and China trade talks continued ahead of their bespoke 12 August deadline, but no agreement was reached.

President Trump has wielded tariffs as geopolitical bargaining chips with several countries. Most recently, he claimed his trade-related threats helped Thailand and Cambodia reach a ceasefire on 28 July, following five days of border fighting that killed at least 36 people. Trump’s approach has been less effective in resolving the Russia-Ukraine conflict, where his frustration with President Putin seems to be growing. During the month, the US promised to send more weapons to Ukraine and threatened secondary tariffs on countries supporting Russia if no deal was signed in the next 50 days, with the deadline subsequently shortened to 8 August. Elsewhere in Ukraine, protests broke out after President Zelensky endorsed a bill that would undermine the independence of key anti-corruption agencies. The move sparked the biggest backlash against Zelensky since the onset of the war.

Sovereign rating upgrades once again outweighed downgrades during the month. Two countries were elevated to investment grade status: Azerbaijan was upgraded to BBB- by Fitch, following Moody’s upgrade to Baa3 earlier in the month, and Oman also received an upgrade to Baa3 from Moody’s. Elsewhere, S&P and Fitch both upgraded Bulgaria to BBB+ after the country was officially accepted in the eurozone. In the high-yield space, Moody’s upgraded Argentina’s rating for a second time this year to Caa1, citing gradually reducing currency restrictions and increasing foreign exchange reserves. Moody’s also upgraded Turkey to Ba3, reflecting its growing track record of more effective policymaking. Lastly, S&P upgraded Pakistan to B-, marking its second single B rating, due to better financial conditions and fiscal consolidation efforts.

In terms of downgrades, S&P cut Senegal’s rating for the second time in five months to B-, its lowest rating since 2000, citing a more constrained budgetary position and revised debt-to-GDP ratio.

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 EM bonds.

In EM local bond markets, although many rate-cutting cycles are mature, central banks will likely persist with lowering 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 dampening but not disappearing.