EM Volatility Declines, Forward Yields Hold at 7% — ZE Outlook Confirmed


By Chinedu Okoye 


Recent Developments and Zero Equilibrium Outlook:

The recent decline in emerging market (EM) volatility and the stability of forward market implied yields at an average of 7% have reinforced Zero Equilibrium’s bullish stance on EM sovereign bonds.

Back in our Global Macroeconomic and Financial Markets Outlook (Per Asset Class) 2025 published on December 24, 2024, we highlighted that: “EM bonds carry the potential for offering the best risk-reward balance.”¹ – Zero Equilibrium (Dec. 24, 2024)

(Excerpt from ZE Global Financial Markets Outlook for 2025)¹

Despite recognizing ongoing exchange rate risks, we argued that the risk-reward balance potential in EM sovereigns remained compelling going into 2025.


Bloomberg Confirmation:
Bloomberg reporting today highlights this trend: “High-yielding EM currencies remain appealing, with three-month forward implied yields in Mexico, Brazil, and Colombia at 7% or higher. With FX volatility easing, investors are more confident that swings in spot exchange rates won’t eat into those returns.”² – Bloomberg Markets



The Bloomberg Chart above shows the Volatility in EM currencies falling at a faster pace than Development market (DM) peers, which is really the Group of 7. This is likely to fuel more EM carry trade,with investors seeming to have priced in an additional 50bps cut buy the Federal Reserve, a total of 75bps.

As a result investors are optimistic about not just EM currencies but broader EM asset classes, as Goldman Sachs cited in Bloomberg; “A broader decline in volatility pricing across asset classes is supportive for EM carry performance.”²


Potential Investment Implications:

• With lower FX volatility and forward yields holding firm, the EM carry trade is likely to remain a strong driver of flows into EM assets. 

• For yield-focused investors with moderate risk appetite, 2–10 year sovereign bonds continue to present an attractive sweet spot.

• As our ZE Outlook emphasized, EM sovereigns remain central to our 2025 bullish positioning, alongside Treasuries, gold, and gold-backed assets.


Sources:





DISCLAIMER
This article is for informational purposes only and does not constitute financial, investment, tax, or legal advice. Neither Zero Equilibrium nor the author accepts liability for any losses arising from reliance on the information provided. Readers should conduct their own research or consult a qualified financial advisor before making investment decisions.

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