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Emerging markets (EM) debt began 2026 with solid momentum, supported by favorable macro conditions and strong country fundamentals—themes that carried over from 2025. Gains in January and February were driven by a weaker U.S. dollar (USD), high real yields, spread tightening and resilient country-level fundamentals.
However, those early gains reversed in March (Display 1) after U.S. and Israeli strikes on Iran in late February sparked volatility across EMD assets. EM currencies broadly weakened against a strengthening USD, local rates came under upward pressure, and credit spreads widened across select sovereign and corporate markets.
EMD Gains Reversed in March Amid Iran-Driven Volatility
EMD Gains Reversed in March Amid Iran-Driven Volatility
Display 1
Geopolitical shifts reshape market dynamics
Key developments unfolded in the first quarter of 2026, as events in Latin America and the Middle East reshaped market dynamics both regionally and globally.
The Trump administration’s late-2025 National Security Strategy renewed focus on Latin America, paving the way for a more assertive regional posture and increased military presence in the Caribbean. Early in 2026, a high-profile U.S. operation extracted Venezuelan President Nicolás Maduro and his wife, removing him from power, with former Vice President Delcy Rodríguez assuming leadership. The new government quickly introduced sweeping economic reforms—including a revised hydrocarbons law allowing greater private participation in oil production and a cap on state royalties—that were well received by markets. These reforms helped drive a rally in Venezuelan assets through the first quarter.
In late February, coordinated U.S. and Israeli strikes targeting Iranian military sites and senior leadership sparked a rapid escalation in the conflict. Iran retaliated across the Gulf, damaging critical energy infrastructure. The effective closure of the Strait of Hormuz helped push crude oil prices above $100 per barrel at multiple points during the quarter. The conflict escalated further as Israel expanded operations against Hezbollah in southern Lebanon.
Divergent country impacts and policy responses
The resulting energy shock introduced a new layer of complexity for EM economies, with uneven effects across regions. Oil exporters outside the Middle East, including Kazakhstan, Nigeria and Colombia, benefited from higher oil prices. In contrast, energy-importing countries such as South Korea, South Africa and India faced deteriorating terms of trade, rising inflationary pressures and potential growth headwinds.
Several Southeast Asia countries introduced policy responses shortly after the conflict began to address potential oil supply disruptions. For example, Indonesia maintained fixed retail fuel prices, which increased pressure on an already strained fiscal deficit cap. Sir Lanka imposed sweeping fuel quotas and Pakistan introduced a work-from-home policy. Since March, policy responses have broadened globally, ranging from government appeals urging people to conserve electricity to more aggressive measures, such as cutting/suspending fuel taxes, travel restrictions and declaring states of emergency.
As we move beyond the initial market volatility and assess the potential medium- to long-term effects of elevated oil prices, the sustainability of these country-level policies—and the fiscal pressures they may create—will be crucial to monitor.
Outlook: An opportune time for EMD with a focus on fundamentals
Geopolitical risks have introduced volatility across select countries, reinforcing the view that the EMD investable universe is broad and highly differentiated. Rather than focusing solely on the broader market impacts of the war with Iran, investors can assess how geopolitics are influencing the opportunity set across individual countries and issuers. Trade and shipping channels have been disrupted, particularly for oil, which will likely lead to elevated oil prices for some time. The resulting shifts in terms of trade may favor oil exporters outside the Middle East, strengthening their fiscal balances and foreign exchange positions.
While pockets of the market experienced short-term volatility in March, the asset class overall remained resilient. EMD entered 2026 from a position of strength, with many countries exhibiting strong fundamentals, leaving them well positioned to manage the uncertainties surrounding inflation and growth. In this environment, central banks are likely to maintain a “higher for longer” stance, supporting attractive yield levels. The asset class is also benefiting from sustained inflows as investors continue to seek global opportunities. While flows moderated in March, strong momentum resumed in April.
Taken together, we believe the combination of resilience, differentiated opportunities and supportive yield dynamics makes a compelling case for EMD today. In this environment, rigorous bottom-up country analysis by active managers is essential to uncovering value and navigating dispersion.
Taken together, we believe the combination of resilience, differentiated opportunities and supportive yield dynamics makes a compelling case for EMD today.”
Featured Insights
Index definitions:
J.P. Morgan Government Bond Index Emerging Market (JPM GBI-EM) Global Diversified is an unmanaged index of local-currency bonds with maturities of more than one year issued by emerging markets governments. Inception date for index is 12/31/2002.
J.P. Morgan Emerging Markets Bond Index Global (EMBI) Diversified Index tracks total returns for traded external debt instruments in the emerging markets, and is an expanded version of the EMBI+. As with the EMBI+, the EMBI Global includes US dollar-denominated Brady bonds, loans, and Eurobonds with an outstanding face value of at least $500 million
J.P. Morgan CEMBI Broad Diversified Index is a global, liquid corporate emerging-markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging-markets entities.
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