May 2026 EMD review and outlook: resilience amid shifting geopolitics

The Middle East continues to dominate markets

Geopolitical tensions drove significant volatility in sovereign bonds, with yields rising sharply into mid-month following a breakdown in US-Iran negotiations and continued disruption to the Strait of Hormuz. Oil markets were highly volatile, with Brent spot prices spiking to around US$114 per barrel earlier in the month.

At the same time, a strong US core CPI (consumer price inflation) print reinforced fears of persistent inflation, leading markets to push out rate cuts. This drove a sharp repricing across global yield curves, with the US 10-year Treasury reaching a yearly high of 4.67% on 19 May.

As the month progressed, sentiment shifted on growing expectations of a ceasefire or interim US-Iran deal, with reports in late May pointing to a 60-day agreement and renewed nuclear talks. Optimism around a potential agreement drove further moderation in energy prices, with Brent crude closing the month at around US$92 per barrel, down 19% from earlier peaks and its steepest decline since 2020. Easing geopolitical tensions also reduced stagflation concerns, supporting risk assets. Meanwhile, US 10-year yields finished the month up 7 basis points at 4.44%. This backdrop weighed on gold returns, which declined for a third consecutive month, falling 1.7% to US$4,540 per troy ounce.

Strong market activity

Primary market activity was stronger than typically seen in May.  Emerging market (EM) sovereign primary markets remained busy on the back of the April rebound in issuance, following Middle East ceasefire announcements. We saw US$13.5 billion (bn) of issuance in May, which is above the 10-year average of US$10.7bn. Some lower-rated issuers were able to enter the markets, including the issuance of Bolivia’s 9.45% coupon bond. Bolivia entered primary markets for the first time since 2022, issuing US$1bn through a new 5-year bond. Other high yield issuers included Egypt (US$1bn) and Democratic Republic of the Congo (US$0.9bn). Meanwhile, in the corporate space, regional momentum was broad, led by EM Europe and Latin America (Latam). EM Europe posted a record issuance in May, supported by debut and less-frequent issuers, while Mexico drove Latam’s most active May on record. 

In performance terms, the JP Morgan EMBI Global Diversified Index rose 1.00% over the month, driven primarily by spread returns of 0.97%, as spreads tightened by 10 basis points (bps). Treasury returns made a marginal positive contribution of 0.02%. High‑yield bonds outperformed, with spreads tightening by 25bps, while investment‑grade spreads saw a more modest compression of 2bps.

Regionally, Africa was the strongest performer. This was driven by Zambia with a growing market view of a trigger on its 53s, which would result in a step-up on coupon and earlier bond maturity. Mozambique also led returns in the region, driven by reprofiling speculation around its 31s through a likely maturity extension and IMF-linked process.

By contrast, Latam was the largest detractor. Bolivia underperformed, as protests, strikes and road blockades disrupted activity and supply chains. This triggered fuel and food shortages, pressuring bond prices and increasing the risk of broader economic and political disruption.

Turning to local currency debt, the JP Morgan GBI‑EM Global Diversified Index (unhedged, USD terms) returned 0.85% over the month. Index yields tightened by 7bps to 6.19% with FX (foreign exchange) contributing 0.07% and bond returns contributing 0.79%.  In particular, South Africa continued April’s positive performance with Moody’s upgrading the sovereign outlook to positive, reflecting strengthening fiscal performance, rising primary surpluses and credible reform momentum. On the other hand, Indonesia continued its underperformance from April, with global rates and oil prices pushing bond yields higher and weakening the rupiah.

The JP Morgan CEMBI Broad Diversified Index returned 0.38% over the month, driven mainly by spread returns of 0.31%, with Treasuries contributing +0.07%. High‑yield corporates outperformed investment-grade, returning 0.45% versus 0.33%, despite both segments seeing equivalent spread tightening of 5bps.

Regional performance was positive, with Africa and Asia supporting returns. In Africa, Africell performed strongly following robust full-year 2025 results, with revenue up 14.8% year-on-year (YoY) and earnings before interest, taxes, depreciation and amortisation (EBITDA) increasing 74% YoY, driven by subscriber growth, data monetisation and operating leverage.

Similarly, in Asia, telecoms issuer Kyivstar reported solid first-quarter 2026 results, with revenue growth of around 27% YoY and EBITDA up approximately 23%, supported by digital revenue expansion and higher ARPU (average revenue per user) from increased data usage. By contrast, EM Europe was the largest regional underperformer, particularly ASG Finance in Lithuania, which lagged due to concerns around weak profitability and execution risk.

Country news

Senegal saw a sharp rise in political risk after President Faye dismissed Prime Minister Sonko, exposing a split between the executive and the legislature. While the reshuffle increases the likelihood of a restructuring‑friendly policy stance, Sonko’s continued influence in parliament raises the risk of policy gridlock. As a result, the IMF timeline has been pushed back to late 2026 at the earliest. Markets are now focused on restructuring parameters, recovery assumptions and LIC (low-income country) constraints rather than the likelihood of restructuring itself.

The conflict in Ukraine remains a prolonged war of attrition, although underlying dynamics have shifted modestly. Ukraine has improved force generation and is rebuilding combat capacity, while Russian forces continue to replace losses with declining quality and weaker coordination. This has enabled limited Ukrainian offensive actions and expanded strikes on logistics and energy infrastructure; however, neither side appears close to a breakthrough, and ceasefire prospects remain low.

Elsewhere, Venezuela formally initiated a sovereign and PDVSA (the state-owned oil firm) restructuring process in May, though uncertainty remains elevated. Authorities are still working through the scale of liabilities, creditor engagement and sequencing. The framework will likely be shaped more by US sanctions policy than a conventional IMF‑led process. Outcomes remain closely tied to oil sector recovery, with bond upside dependent on higher production and the resolution of legal claims.

In Gabon, political transition risks have eased, but fiscal pressures have intensified. The government revised down its 2026 budget under the guidance of the IMF amid constrained market access, highlighting tighter‑than‑expected financing conditions. At the same time, a comprehensive public debt audit is underway ahead of IMF engagement, pointing to continued uncertainty around the true debt stock and underlying fiscal position.

Regarding EM sovereign rating actions in May, Fitch upgraded Argentina to B- from CCC+ (stable), citing improved fiscal and external balances, reform momentum under President Milei – including labour reform and the 2026 budget – and strong FX reserve accumulation as the country transitions to a net energy exporter.

In contrast, S&P revised Mexico's outlook to Negative from Stable (affirming BBB), flagging very slow fiscal consolidation amid weak growth. Moody's revised South Africa's outlook to Positive from Stable (affirming Ba2), its first positive outlook revision since 2007. Elsewhere, scheduled reviews resulted in affirmations with no changes for Angola (Fitch, B- Stable), Georgia (Fitch, BB Stable), Gabon (Fitch, CCC-), and Hungary (Moody's, Baa2 Negative).

Outlook: positive 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. While spreads are tight relative to historic levels, 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. But the recent moves in oil and gas prices have brought rate-cutting cycles to an end and in certain circumstances prompted the onset of rate-hiking cycles. Even so, local markets continue to offer attractive carry at moderate risk levels, while select frontier market central banks should have scope eventually to return to easing. A more hands-off stance towards FX management in several frontier markets should also help limit negative spillovers. 

EM corporates continue to exhibit strong credit fundamentals, supported by low leverage, healthy interest coverage ratios, and benign default rates. Technicals remain favourable, with net supply expected to stay negative as issuers prioritise balance sheet repair and debt reduction. As a result, EM corporates continue to offer attractive carry within one of the lower risk segments of the EMD universe, supporting a compelling risk-adjusted return profile. 

Key risks to the outlook include a prolonged resolution of the Iran conflict, which could disrupt supply chains further, push oil prices above US$120 per barrel and trigger broader risk-off sentiment. In addition, contagion from developed-market fiscal concerns could steepen global yield curves, raising financing costs and constraining market access for lower-rated EM issuers.   A sharp correction in US equity markets, particularly following the AI-driven rally, could generate a negative global wealth effect and prompt EM risk repricing. Ongoing US policy uncertainty, spanning foreign policy, trade and tariff decisions, as well as questions around Federal Reserve independence, also remain a source of two-sided risk for EM assets.

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)