EM Fixed Income: Enduring the heat, trying not to get burned

Rising US Treasury yields and elevated energy prices continue to pressure emerging market (EM) assets, forcing a shift toward more selective, high-carry strategies. While global growth remains resilient, market participants are increasingly repricing the distribution of growth outcomes, resulting in curve steepening across EM rates. Bond positioning and volatility, rather than broad energy exposure, primarily explain recent FX sell-offs. Meanwhile, Brazil’s political landscape offers a potential turning point; the recent election results suggest a more cohesive legislative environment, fueling optimism for fiscal consolidation and a potential path toward regaining investment-grade status. Despite these challenges, the base case remains a reflationary environment where carry strategies perform, provided central banks deliver on necessary rate adjustments to stabilize long-end yields.