Russia threatens default on May 25

Investors continue to reduce their risk exposure to EM bonds, particularly in the lower-quality segments. Spreads on EM high-yield government bonds, for example, widened 13 bps during the week. African debtors were the main segment impacted, widening 30 bps during the week, as investors reduced their risks to governments that are particularly sensitive to higher debt service costs given the recent strength in the dollar.

In EM local-currency markets, central bank actions are at the forefront of interests. Poland, for example, raised interest rates 75 bps last week. We expect this trend to continue as long as inflation continues to come in higher than anticipated. EM local-currency yield curves are also (bear) steepening as the risk of stagflation increases. Therefore, we have extended the duration of our local-currency positions, e.g. one- to two-year positions to five- to seven-year positions. But we continue to maintain an underweight allocation to EM local-currency bonds, because we expect strength in the U.S. economy to continue to outstrip EM economies, most notably in China.”