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Emerging market local bonds face softer momentum as Fed path clouds
HSBC Asset Management said the gap between EM and US real rates has narrowed, reducing room for further policy easing and limiting upside for EM bond performance this year.
HSBC Asset Management said emerging markets local-currency bonds posted strong gains over the past four years, helped by credible local policies and attractive real yields. However, the firm noted that year-to-date momentum has weakened as US Treasury yields climbed and EM-US real interest rate differentials narrowed, making the outlook more country specific rather than a broad beta trade.
In its view, uncertainty around the Federal Reserve’s policy path has contributed to higher long-dated US Treasury yields. HSBC Asset Management said this development has reduced the space for further policy easing, which it expects to cap upside potential for emerging market bond performance.
The firm also pointed to differing conditions across regions. It said several Latin American markets, including Brazil and Mexico, began the cycle with strong inflation-fighting credentials after tightening policy in 2021 to 2022, giving central banks more flexibility as inflation moderates.
By contrast, HSBC Asset Management said parts of Asia, including Thailand and the Philippines, face a tougher policy trade-off because inflation risks remain elevated, which could constrain central banks’ ability to respond as conditions change.