Dollar on a Roll: US Jobs Data and Middle East Tensions Drive EM Bond Rally

The dollar-denominated emerging market (EM) bond market has witnessed a remarkable rally in recent months, with the US non-farm payrolls data and geopolitical tensions in the Middle East acting as catalysts for further momentum. The Bloomberg index of hard currency EM sovereign bonds has been on a winning streak, marking five straight months of gains, as investors seek refuge in risk assets amid a supportive macro backdrop.

The US non-farm payrolls data released on Friday, October 4, showed a slowdown in hiring, with just 70,000 new jobs added in September. This disappointing figure bolstered the case for additional Federal Reserve rate cuts, as the central bank seeks to stimulate economic growth. The slower hiring pace and expectations of lower US interest rates have contributed to a weaker dollar, making EM bonds more attractive to investors.


Geopolitical tensions in the Middle East have also played a significant role in driving capital flows into EM bonds. The Israel-Iran conflict has raised concerns about potential supply disruptions in global energy shipments, leading investors to seek safer havens. The rally in EM bonds has been accompanied by a strengthening of EM currencies, with the rand and Thai baht showing particular resilience.


The recent gains in the US dollar have impacted the attractiveness of EM bonds, as a weaker dollar makes EM assets more affordable for foreign investors. The US non-farm payrolls data and geopolitical tensions in the Middle East have contributed to currency movements, with investors anticipating further shifts in monetary policy and geopolitical risks.

The performance of EM stocks and currencies has influenced the overall appeal of EM bonds in the near term. The MSCI EM stock index has been on a winning streak, with four consecutive weekly gains, while EM currencies have shown mixed performance. The relative strength of the Turkish lira and the Philippine peso has held back major portfolio inflows, despite recent gains.

In conclusion, the rally in EM dollar bonds has been driven by a combination of factors, including the US non-farm payrolls data, geopolitical tensions in the Middle East, and a supportive macro backdrop. As investors continue to seek refuge in risk assets, the EM bond market is poised to benefit from further momentum, provided that geopolitical risks and global economic conditions remain stable.