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Signals & Noise: Four Themes Driving Emerging Markets
- Report Context & Date
- Recorded Tuesday, September 9, 2026, by David Hauner, Head of Global Emerging Market Fixed Income Strategy at BofA Securities.
- Report titled "Emerging Convictions, Buyback EM" within the "Back-to-School" series.
- Overall Market Stance
- Constructive on emerging market (EM) carry trades, supported by high global rates and a range-bound US dollar.
- Cautious on EM rates and credit spreads due to persistent inflation and potential equity risk-off events.
- EM inflation momentum is rising, with core inflation hitting post-pandemic highs; energy prices remain 50% higher year-over-year.
- Theme 1: Treasury Buybacks ("Beant's Put")
- Treasury buybacks are viewed as generally positive for EM regardless of execution success.
- Successful Buyback Scenario:
- Lower yield curve volatility makes EM carry more attractive.
- Failed Buyback Scenario:
- Increased term premium may trigger expectations of Treasury market intervention or deficit cuts.
- Both outcomes likely weaken the dollar against EM currencies.
- Theme 2: Federal Reserve Policy ("Walsh's Call")
- Markets currently price ~2 rate hikes by Q1 2026; BofA forecasts 3 total hikes.
- One additional hike is not considered a "game changer" given robust global growth.
- Three hikes would only restore the Fed funds rate to 2035 levels, with a real rate of 1.25% deemed non-restrictive.
- Persistent global inflation in Q4 caps dollar strength, supporting EM carry even during hikes.
- Rising global yields negatively impact EM rates and credit spreads more than carry trades.
- Theme 3: Political Risks (US Midterms & Geopolitics)
- US midterms likely delay a Fed hike in September, pushing it to December.
- Geopolitical tension with Iran raises the risk of an oil price spike, given low crude stock levels.
- US equity weakness could be dual-natured for EM:
- Positive: Weaker dollar supports EM currencies.
- Negative: Significant pressure on EM credit spreads.
- Theme 4: Other Political Events & Currency Outlook
- Brazil's autumn elections are identified as the primary EM political event.
- Trump-Xi summit in September is expected to be constructive for the Chinese currency (CNH).
- CNH valuation forecast: 6.60 by year-end against the USD, driven by exporters converting large surpluses.
- Investment Strategy & Sector Views
- Preferred Assets:
- High-yield EM carry trades in Brazil, Colombia, Peru, Turkey, and frontier markets (Egypt, Kazakhstan, Nigeria).
- CNH (offshore Renminbi) viewed as undervalued with favorable fundamentals.
- Avoided/Risky Assets:
- Sovereign credit spreads: Models send sell signals against US high yield; preference for adding hedges.
- Risk assets: Models suggest selling risk assets generally.
- Sentiment & Positioning:
- EMFX sentiment indicator is optimistic, suggesting positioning is long but not yet at a contrarian sell level.
- Local market valuations remain attractive.
- Risk Triggers:
- Potential spillover from widening US investment-grade bonds (specifically hyperscalers) into EM credit.
- Midterms and Fed rate hikes may increase volatility in the sovereign credit asset class.
- Preferred Assets: