Hello, and thank you for joining us to review recent developments in Emerging Markets Fixed Income. I’m Katrina Uzun, an Institutional Portfolio Manager at MFS focused on Emerging Markets Debt Strategies.
Let’s take a few minutes to walk through the key developments in the second quarter and how we’re thinking about the path forward.
Looking back, the second quarter turned out better than many feared — but that wasn’t a given. At the start of the quarter, markets were rattled by sweeping US tariff announcements, which surprised investors both in scale and tone. These measures raised concerns about stagflation and even the potential for recession, particularly if escalation continued. Fortunately, tensions eased with the announcement of a 90-day pause, which helped spreads retrace and brought some relief to markets. In the Middle East, the risk of a regional war rose dramatically after Israel and the US bombed Iran. However, a temporary ceasefire occurred, which reduced this risk.
In the end, emerging markets proved resilient. EM hard currency debt returned 3.3% for the quarter, with high-yield continuing to outperform investment grade. Notable standouts included Ecuador and Lebanon, returning 48% and 22%, respectively.
The US dollar also surprised, weakening 7% despite increased volatility — defying its typical safe-haven behavior. That move supported local currency debt, which returned 7.6% for the quarter, with positive contributions from both currency and interest rates.
So the quarter landed in a better place than where it began, but while the outcome was constructive, the path was far from smooth — and we believe that still warranted a cautious approach due to unresolved tariff uncertainty, elevated global volatility and tight valuations.
So where do we stand now?
We believe the outlook for emerging markets debt is constructive, supported by three key factors: a resilient global macro backdrop, a weaker US dollar, and solid emerging markets fundamentals.
First, global growth remains broadly intact. While tariffs may weigh on exports in the second half of the year, we see these as short-term headwinds. Longer term, we expect clarity and eventual resolution, with the impact mostly limited to manufacturing hubs in Asia.
Second, we believe we’re entering a new cycle for the US dollar — one characterized by gradual depreciation. A lot of investors are asking whether the dollar’s decade-long run is over, and we think that it is.
For the first time in a while, markets are beginning to focus on US fundamentals — and the picture isn’t great. The fiscal deficit stands out in particular. Even with resilient US growth and unemployment below 4%, the deficit is running at about 6% of GDP. That divergence is unsustainable, and with the passage of the latest fiscal package — the so-called “Big Beautiful Bill Act” — the deficit is set to widen even further over the next few years. This fiscal trajectory is likely to put sustained pressure on the dollar.
A weaker dollar, in turn, is supportive for both hard and local currency emerging markets debt. For hard currency issuers, it reduces the burden of dollar-denominated debt, and for local markets, emerging markets currencies tend to appreciate in weaker dollar environments.
Third, emerging markets fundamentals: they remain strong.
Inflation expectations have been successfully re-anchored in most emerging markets economies — an important achievement following recent global shocks. This has helped reduce inflation risk premiums and supported the development of more sophisticated local markets.
And fiscally, the picture is improving. While there are individual stories to monitor — like Colombia and Brazil, where deficits are wider — the average emerging markets debt-to-GDP ratio remains relatively stable and meaningfully below levels seen in developed markets. The trend in fiscal consolidation and improving primary balances is encouraging and helps support emerging markets creditworthiness.
So how are we positioned?
In our hard currency strategy, we’ve leaned into high-quality names — like Indian renewable energy credits and BB-rated sovereigns, such as Paraguay and Uzbekistan — reflecting our focus on strong credit fundamentals and resilience.
More recently, we’ve been increasing exposure to local markets as part of a broader strategy to position for that continued dollar weakness.
That same theme is visible in our local currency strategy, where we’ve shifted from a slight dollar overweight to an underweight, diversifying our short dollar positions. Our largest overweights are in Indonesia, Uruguay, Jamaica, Brazil and Peru.
On the rates side, we’ve reduced our duration overweight, trimming positions in markets like the Czech Republic, South Africa and Mexico, where easing cycles have paused, and we’ve rotated into markets like Thailand and the Philippines, where we see better carry and risk-adjusted opportunities.
We expect volatility to persist in the near term, which is why we continue to emphasize a disciplined process, strong risk management, and active portfolio construction.
As always, our priorities remain clear: protect capital, stay liquid, and position portfolios to take advantage of opportunities as they arise.
Thank you for your time and trust as we continue to focus on creating value responsibly for you, our investors.
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The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Past performance is no guarantee of future results.
Important Risk Considerations:
The strategy may not achieve its objective and/or you could lose money on your investment.
Bond: Investments in debt instruments may decline in value as the result of, or perception of, declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall). Therefore, the portfolio's value may decline during rising rates. Portfolios that consist of debt instruments with longer durations are generally more sensitive to a rise in interest rates than those with shorter durations. At times, and particularly during periods of market turmoil, all or a large portion of segments of the market may not have an active trading market. As a result, it may be difficult to value these investments and it may not be possible to sell a particular investment or type of investment at any particular time or at an acceptable price. The price of an instrument trading at a negative interest rate responds to interest rate changes like other debt instruments; however, an instrument purchased at a negative interest rate is expected to produce a negative return if held to maturity.
Emerging Markets: Emerging markets can have less market structure, depth, and regulatory, custodial or operational oversight and greater political, social, geopolitical and economic instability than developed markets.
International: Investments in foreign markets can involve greater risk and volatility than U.S. investments because of adverse market, currency, economic, industry, political, regulatory, geopolitical, or other conditions.
Derivatives: Investments in derivatives can be used to take both long and short positions, be highly volatile, involve leverage (which can magnify losses), and involve risks in addition to the risks of the underlying indicator(s) on which the derivative is based, such as counterparty and liquidity risk.
High Yield: Investments in below investment grade quality debt instruments can be more volatile and have greater risk of default, or already be in default, than higher-quality debt instruments.
Please see the applicable prospectus for further information on these and other risk considerations.
The portfolio is actively managed, and current holdings may be different.
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