The bear market in EM credit is ongoing, though we are approaching our targets. We prefer HY versus IG though geopolitics is a risk. The bear market in EM local bonds has been calmer recently, but inflation and DM bond trends suggest patience is needed before turning bullish.

FX & EM Strategy: Given limited evidence of inflation moderating, we don’t think that the timing is right to turn bullish on EM local bonds, though outperformance versus G10 peers could well continue given the stage of the cycle. In FX, rising geopolitical tension raises short-term risks and we stay neutral.

Sovereign Credit Strategy: Amid significantly negative EM total returns, HY is actually outperforming. We expect this outperformance to last despite our still bearish view on the overall index. EM HY still looks cheap, we expect UST yields to keep moving higher and we have a positive bias on EM FX. The key risk to HY comes from the still heavy positioning amid a broader market sell-off, potentially driven by Russia/Ukraine risks. In case the situation was to escalate further, we think that there would be notable spillovers to the rest of EM. The four channels of spillover include physical proximity, economic and financial linkages, energy and potentially food prices and the usual financial markets spillover that would likely impact HY and in particular the larger fund OWs. We also remove our dislike stance on Israel.

We extend the target on 1s5s COPxIBR flatteners to -50bp. We keep long EUR/BRL, but acknowledge that Russia/Ukraine developments remain a headwind.

We remain neutral on COP for now, but we acknowledge rising risks associated with the upcoming election, particularly given less cohesive messaging from centrist candidates and as polls continue to show a higher preference for unorthodox platforms. In addition, COP remains highly exposed to the global backdrop and to a more hawkish FOMC, given its wide current account deficit.

Dislike: Pay 10-year COPxIBR (10k DV01), COPxIBR 1s5s flattener: We extend the target on our 10-year IBR payer to 8.00%, given rising risks around longer-dated UST. For 1s5s, we extend the target to -50bp and tighten our stop to 20bp amid a 100bp hawkish surprise, which should prompt markets to price in a higher probability of larger hikes at the upcoming meetings. Curve pricing continues to shift towards a potential 125bp hike in March.