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<\/figure>\n\n\n\nNote: Interest rate duration refers to US rates performance. EM dollar debt IG forecasts investment grade hard currency debt, while EM dollar debt HY forecasts non-investment grade hard currency debt. Investment grade bonds are the highest quality bonds as determined by a credit rating agency. High yield bonds are more speculative, with a credit rating below investment grade. EM local rates forecast EM local currency bond prices, and EM currencies forecast EM currencies versus the US dollar.<\/em><\/p>\n\n\n\n Figure 2: Improving sentiment towards EM debt<\/strong><\/p>\n\n\n\n Source: Schroders, 31 August 2025<\/em><\/p>\n\n\n\n Figure 3: EM debt fund flows<\/strong><\/p>\n\n\n\n Source: Schroders, JP Morgan, 31 July 2025<\/em><\/p>\n\n\n\n While further dislocations emanating from developed market government bonds may still require our EMD portfolios to use tactical currency and interest rate duration hedges, we expect the recent positive performance trajectory of EM debt to remain supported by the following dynamics:<\/p>\n\n\n\n (i) Global growth expectations are recovering<\/strong> after the dip experienced during the first half of this year. This global growth resilience is continuing despite the extreme uncertainties generated by US trade tariffs, the persistent concerns about China\u2019s long-term growth trajectory and the historically high levels of real (inflation-adjusted) rates elsewhere in EM. With strong balance of payments, very manageable external financing needs and still reasonably stable and predictable policy frameworks in key EMs, we expect the asset class to sustain this growth resilience.<\/p>\n\n\n\n (ii) The EM disinflation cycle remains firmly in place<\/strong> with the recent dollar depreciation reinforcing the disinflationary forces in EM. China\u2019s industrial overcapacity and weak domestic demand continue to drive its producer price indices into deflation, reinforcing China\u2019s ability to export cheap goods globally. With China\u2019s property malaise still ongoing, deflationary pressures are expected to persist. However, our Economics team highlights that these effects will not be evenly distributed around the world. Countries with high export overlap with China may shield industries through tariffs. Conversely, commodity-exporting EMs in Latin America, Africa, and the Middle East, where export overlap with China is low, stand to benefit from cheaper imports, higher real incomes, and stable trade balances. High yielding bonds in these markets should continue to benefit handsomely from these trends, especially given their still depressed valuations).<\/p>\n\n\n\n (iii) Global financial liquidity remains ample<\/strong> despite high levels of real rates and the ongoing withdrawal of official dollar liquidity generated by the rapid rebuild of the US Treasury General Account at the Fed (this is the government main \u2018checking account\u2019 at the Fed, which receives tax receipts and proceeds from debt sales). This ample liquidity can still be seen in the strong growth of global real monetary aggregates (which measures money in circulation across economies), the recovery in EM foreign exchange reserves (figure 4) and the apparent rebound of portfolio flows into EM.<\/p>\n\n\n\n![\"Figure](\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/09\/Screenshot-2025-09-12-105813.png\")
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