January 2026 EMD outlook: record issuance amid geopolitical upheaval

All change in Venezuela

January was marked by significant geopolitical developments, opening with the capture and extradition of Venezuelan President Maduro by US Special Forces to face narco‑terrorism charges. Delcy Rodriguez (vice president) assumed interim leadership. She has allowed Washington to broker Venezuelan oil sales, reopening access to export channels previously restricted by sanctions. Venezuelan bonds subsequently gained around 30% over the period.

At the same time in Iran, nationwide unrest intensified following a currency collapse and inflation exceeding 40%, with rising civilian casualties prompting speculation of potential US‑led intervention. Consequently, the increase in supply risk helped lift the oil premium, with Brent crude rising 16.2% to $70.7 per barrel over the month.

Trump: no longer Fed up?

In the US, President Trump nominated former Fed Governor Kevin Warsh to be US Federal Reserve (Fed) chairman. Warsh’s policy recommendations include advocating rate cuts while simultaneously calling for a significantly smaller Fed balance sheet. The news pushed 10‑year Treasury yields higher by 7 basis points to 4.24%. 

Meanwhile, Trump revived efforts to secure control or permanent access to Greenland, threatening to impose 10-25% tariffs on EU allies seen as obstructing US control. Against this backdrop, demand for ‘safe‑haven’ assets strengthened, with central bank buying and heightened geopolitical tensions driving gold briefly above US$5,500/oz before it finished the month up 16.2%. At the same time, silver recorded its strongest rally in more than 15 years, reaching US$120/oz and ending the month up 11.2%.

Record EM bond issuance

January marked the highest month on record for EM sovereign issuance, with supply reaching US$69.9 billion (bn) and surpassing the previous monthly record set in April 2020 (US$53.4bn). While EM investment grade (IG) made up the bulk of issuance (US$52.5bn), it was also the strongest month ever for high yield supply, which totalled US$17.5bn. Notable transactions included large deals from Mexico (US$14.5bn) and Saudi Arabia (US$11.5bn).

Activity was similarly strong on the corporate side, with US$89bn priced in January, exceeding the previous monthly high of US$81bn recorded in January 2020. CEEMEA was the main driver, contributing US$41bn of issuance, led by the Middle East and Africa at US$31bn, which was also a regional monthly record. Asia followed with $35bn issued over the month.

On the markets: Latin America leads the way

In terms of performance, the JP Morgan EMBI Global Diversified index rose by 0.7%. This was driven by a positive spread return (+0.8%), as spreads tightened by 9bps to 245bps, the tightest level since 2007, though partially offset by a negative Treasury return (-0.12%). High yield notably outperformed (+1.5%), with spreads tightening by 17bps, while investment grade underperformed, widening 3bps.

Latin America led regional performance, driven by strong returns in Venezuela, Argentina and Ecuador. Among individual countries, distressed credits contributed positively to index performance.  Lebanon continued December’s positive performance, driven by credible US security backing and positive bilateral talks to advance the Hezbollah disarmament plan. These meetings, tied to the Lebanon-Israel ceasefire mechanism, signalled lower escalation odds and eased near‑term sovereign risk.

Elsewhere, Sri Lanka’s bonds rallied after a much stronger‑than‑expected fiscal outturn. January’s customs revenues beat their target by 45% (LKR 232.6bn vs LKR 160.2bn) on the back of import recovery and stricter enforcement. This boosted confidence in the government’s ability to meet IMF fiscal targets.

In Africa, Gabon’s bonds rose as investors welcomed the government’s renewed engagement with official creditors. Libreville has opened talks with the World Bank on a US$500 million loan, with a delegation set to visit Washington for follow‑up negotiations. The discussions aligned with reported plans to re‑engage with the IMF, whose US$553 million programme was suspended in 2024.

Conversely, Ethiopia and Egypt were among the biggest index detractors. Egypt underperformed due to weak market sentiment rather than any specific factors. In the case of Ethiopia, the country’s debt‑restructuring process suffered a major setback when official creditors rejected the preliminary eurobond restructuring deal. They argued that the terms Ethiopia had agreed with private bondholders violated the required Comparability of Treatment standard, forcing Ethiopia to reopen negotiations.

Local currency sovereign bonds

The JP Morgan GBI-EM Global Diversified Index (unhedged in US dollar terms) rose by 2.2% this month. The index yield declined by 1bp to 5.86%. While the bond return was (+0.8%), performance was largely driven by positive currency return of +1.4%.

All EM regions posted positive currency returns over the period, with Latin America leading gains. Stronger‑than‑expected global growth and record inflows into EM funds added further momentum, reinforcing demand for EM FX.

Currency appreciation was also supported by broad US dollar weakness. While local bonds generally performed well, Asia was the outlier, posting negative returns as heightened rate‑path uncertainty and divergent policy signals pushed yields higher. Brazil was among the top performers, as inflation expectations continued to weaken. Strong foreign inflows into local bond and equity markets helped fuel a 4.2% appreciation in the Brazilian real over the month.

At the other end, India underperformed as the rupee fell to record lows amid weak capital inflows and higher-than-expected government borrowing for the upcoming fiscal year. These pushed 10-year bond yields up to 6.69%. Of the central banks across EM that held meetings, most were cautious in January with Latin America the only region leaning towards easing. 

Lastly, the JP Morgan CEMBI Broad Diversified (EM Corporate Index) rose by +0.7%. A positive spread return (+0.7%) was the main driver of performance while the Treasury return was flat over the period. Overall spreads tightened by 13bps to 224bps. High yield corporates also outperformed (+1.4%) as their spreads tightened by 26ps, whilst investment grade corporates underperformed (+0.3%). Regionally, Europe and Latin America led performance, whereas the Middle East and Asia, which have a higher concentration of investment grade issuers, lagged. In terms of sectors, Real Estate, Industrials, and Metals and Mining outperformed, whilst Financials and Diversified underperformed.

Country news: US, Ukraine and Russia

For the first time since 2022, the US, Ukraine and Russia held trilateral talks in Abu Dhabi. Follow‑up sessions are planned for early February, as part of an effort to re‑establish a structured negotiation channel. Ukraine also confirmed that its security‑guarantee agreement with the US was fully ready pending signature. The EU signalled it would add guarantees tied to eventual EU accession. At the same time, Russia paused strikes on Kyiv at Washington’s request, though attacks continued elsewhere, underscoring the fragility of any de‑escalation.

Trade tensions

Moving to global trade, the signing of the EU-Mercosur FTA ended a quarter-century of negotiations. However, it immediately encountered a political and legal setback as the European Parliament narrowly voted to refer the agreement to the EU Court of Justice, questioning its compatibility with other EU treaties. This decision freezes the parliamentary ratification process and hinders momentum towards implementation. The move followed widespread farmer protests across Europe.

In Latin America, Ecuador announced that it would impose a 30% tariff on Colombian imports from 1 February, arguing that Colombia was failing to adequately curb drug trafficking along their shared border. Colombia responded by introducing its own 30% tariff on Ecuadorian goods and suspending electricity exports to its neighbour. Tensions intensified further when Ecuador raised the fee for transporting Colombian crude through its pipeline. This stand‑off marks the most serious bilateral rupture in years and poses risks for supply chains and inflation in both economies.

Ratings: mostly positive

Moody’s upgraded Kenya from Caa1 to B3 (stable), citing reduced default risk due to stronger external liquidity, higher reserves, a firmer shilling and improved market access. However, weak debt affordability and slow fiscal consolidation still weigh on its profile. S&P lifted Ukraine to CCC+ (stable), reflecting clearer external‑funding prospects and stabilised government operations despite the war.

Elsewhere, Moody’s raised Ecuador by two notches to Caa1 (stable), supported by durable fiscal reforms under its IMF programme – though large amortisations from 2026 leave it exposed to shifts in sentiment. Fitch upgraded Bolivia from CCC- to CCC, noting reduced default risk after the change in government improved prospects for external financing, boosted multilateral disbursements and enabled meaningful fiscal adjustment through subsidy removal.

EMD team outlook: upbeat with caution

We continue to see value in the high yield and frontier space in EM hard currency. Although credit spreads remain relatively tight, this is justified by the ongoing implementation of structural reforms across several countries, as well as continued support from multilateral institutions. Financing conditions are expected to remain favourable for frontier markets, as market access has been restored for the vast majority of issuers, which should also help to support spreads. In addition, yields at front end of the curve are attractive, offering potential for capital gains through roll-down and positive liability management exercises such as buybacks.

In EM local markets, several mainstream EM rate-cutting cycles are now well advanced. Nonetheless, central banks are expected to continue easing as growth moderates, inflation stays close to target, and policy rates remain elevated versus historical norms. Of the 15 major EM local markets, eight to 10 are expected to implement rate cuts in 2026, while only one is raising rates.

Additionally, frontier market central banks are forecast to reduce rates further given their delayed cutting cycles. Real EM yields continue to offer an attractive premium over developed markets and FX volatility has subsided to historically low levels. As such, we maintain an overweight position in EM currencies.

EM corporates continue to demonstrate robust credit fundamentals, characterised by low leverage levels and healthy interest coverage ratios. Default rates across the sector remain benign. Technical factors are also providing strong support to the asset class, with net supply expected to remain negative as EM corporates persist in their efforts to pay down bonded debt. Meanwhile, EM corporates continue to offer attractive carry for one of the lowest risk segments within the broader EMD universe.

The biggest risks to the EM asset class include the imposition of new tariffs, which could threaten EM exports and lead to policies that disadvantage EM countries. There’s also heightened uncertainty if the Supreme Court strikes down tariffs under the International Emergency Economic Powers Act. A further downturn in the Chinese economy could weigh on commodity prices, particularly oil. Conversely, a further steepening of the US Treasury curve may raise financing costs for frontier issuers and limit access to the primary market. Geopolitical risks also remain elevated given the unpredictability of the Trump administration and the lack of a resolution of the Ukraine war. Tensions in the Middle East also remain acute.

 

1. As measured by the JP Morgan EMBI Global Diversified Index
2. As measured by the JP Morgan CEMBI Broad Diversified Index
3. As measured by the JP Morgan NEXGEM Index
4. As measured by the JP Morgan GBI-EM Global Diversified Index (unhedged in US dollar terms)