The two stories of emerging market bonds. What could happen if the Fed raises rates in September?
Many analysts have described July as a particularly challenging month for emerging financial markets overall: a distinctly uneven period, marked by an unprecedented swing in the Korean market — a record jump of around 18% in a single session after three consecutive days of declines of similar magnitude — and by a year-to-date gain for emerging market equities that narrowed to 18%, from the 28% achieved between January and June.
To explain what is happening in this segment of the market, analysts point to four key factors: oil prices, a Federal Reserve stance perceived as less determined on inflation, a stronger US dollar, and growing fatigue surrounding the investment boom linked to artificial intelligence. Our own indicators confirm a picture that is lukewarm rather than negative: emerging market equities remain slightly positive, with a health score of 59.9 and a directional signal of +19.7, but the recovery of recent weeks has been weaker than the rebound recorded by global equity markets over the same period.
The picture is clearer on the fixed-income side, and this is where the more interesting story emerges. There are two main ways to gain exposure to emerging market debt: one is denominated in US dollars, which isolates emerging credit risk without exposing investors to local currency fluctuations; the other is denominated in the currencies of individual emerging economies, adding a second layer of risk — foreign exchange risk — on top of the credit component. They are related, but not identical: they share exposure to emerging debt fundamentals, yet they respond to different drivers.
Over the past six months, the two segments have moved in opposite directions. Emerging market dollar-denominated bonds have come under significant pressure — with a health score of 33.6 and a directional signal of -32.8 — and have lost 1% in price since February 4. Local currency emerging market bonds, by contrast, remain slightly positive — with a health score of 63.3 and a directional signal of +26.6 — posting a 1% gain over the same period.
The difference in price performance alone is limited.
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