Emerging market credit: Liquidity in a new era

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Meridy Cleary: Hello, and welcome to J.P. Morgan's Making Sense. I'm Meridy Cleary from the FICC Market Structure and Liquidity Strategy team. Today's episode focuses on emerging market credit, which is navigating a very different landscape than even a few years ago, driven by inflows, a shifting investor base, and greater data availability. To discuss how these themes are shaping liquidity, I'm pleased to be joined by James Banghart, global head of EM Credit Trading at J.P. Morgan. James, thanks so much for being here.

James Banghart: Thanks, Meridy. Thanks for having me.

Meridy Cleary: So James, let's start with the backdrop here. With higher rates driving more inflows into fixed income, emerging markets have broadly benefited alongside a growing set of international investors seeking local market exposure. At the same time, recent volatility events have tested liquidity in EM. So focusing on emerging market credit trading, how has the Middle East conflict over the past two quarters impacted EM credit trading from your perspective, James?

James Banghart: Sure. I'd say for us, the sort of interesting thing has been you had the sort of the start of the kinetic side of the Iran war in the end of February, and then you had a lot of issuance prior to that kicking off, and then you came into March, and there was post the war, there was I think there was basically no issuance in March. So you had very little issuance. You also had a sell off in rates, which meant there was a lot more money coming into fixed income generally, which we saw across the board, and EM benefited from that as well. Which meant there was just a lot of money around, and there wasn't really anywhere for it to go because the issuance hadn't happened. So you had an initial movement spreads wider, but then that sort of ground back down just because the sort of wall of money coming in has created a bit of a sort of an issue overall.

The other thing that happened is we sort of looked at it in the first couple weeks, you felt that the Middle East was really going to suffer from a credit perspective, and it never really played out actually. There was still a lot of money sort of trying to find home and sort of looking at the opportunities from the Middle East perspective, rather than looking at the risk side of things. Then the sort of other dynamic that's played through is that China has been sort of a large saver for a long time and a large exporter of capital given the lack of issuance from Chinese issuers in dollars generally given the geopolitical realities of the ground and China's sort of deemphasizing the dollar across the board, the ability for them to export into the Middle East has been sort of the one saving grace for them in terms of investing. But that stopped when the war kicked off in February.

So China's been very quiet in terms of investing in the Middle East for the last few months. That's put a lot more pressure in the local markets in China as far as where does the money go I'd say the overwhelming thing is that rates being higher has driven more money into fixed income. That's created just a backlog of cash around.

Meridy Cleary: Interesting. And I guess to your point, how has the EM credit investor base evolved over the last few years?

James Banghart: In EM credit, you the real money investor base, which has been growing and been consistent through a number of years. And a lot of that’s the J.P. Morgan EMBI index based tracking investor base. Then there's been a growth of the hedge fund pods, which has been true for the last two or three years. And that's obviously been true across all markets. That's created a sort of dynamic where the pods tend to trade the same way. So they tend to be, it exacerbates local moves. The bigger thing in EM that's been true for the last sort of 12 to 18 months has been, there's been a growth in local markets. So you've got the Middle East, which has its own investor base, which has grown a lot, mainly because with oil prices where they were, there was a lot of money coming in and it wasn't a lot of, they were building cash over the last 10, 12 years. And so that money had to be invested and they've been buying other EM countries. I think also as the de-dollarization happens, you do see from central banks, a push to move out of treasuries into other assets. Particularly EM credit is one beneficiary of that. China obviously bought commodities and other things that were non-treasuries, but other central banks we've seen over time have been buying, increased their U.S. dollar emerging credit exposure. And I'd say the other thing is that EM investors traditionally banks have been three years in, they've actually extended it out over the last couple of years. They're sort of like 10 years in. So a general extension of that investor base, which creates its own sort of sub-investor that's not been there before, which again, creates this dynamic where there's just a lot more money around.

Meridy Cleary: And I guess if we shift kind of more to execution trends, when it comes to the evolution of trading protocols in EM credit markets, portfolio trading comes up a lot. It's played a much bigger role over the past few years. Have you seen usage plateau or do you think it will continue to pick up steam similar to what we're seeing in developed markets?

James Banghart: I think within EM, so DM portfolio trading is definitely present in a large protocol that's being used. I think with EM, for us, I think here at J.P. Morgan, I think it's around 1% of our flows in the last 18 months. So when you look at it, it's still a relatively small part of our actual activity. It's growing, it's coming from a very small base and it's definitely a bigger part. I think when we look at the use case for portfolio trading within EM credit, we see it mainly in index rebalancing. So end of month rebalancing flows, you see it as far as money flows coming in and out as well. We don't see it as a real risk changing thing. We also see it in transition. So funds going from either changing weightings in IG to go into EM or vice versa. But again I think it will grow as part of our overall protocol, but I think it'll still remain a smaller part than it is in DM just by nature of the asset class.

Meridy Cleary: Right, definitely starting from a smaller base there. I guess staying on trading protocols that to your point that move risk quickly, ETFs, exchange traded funds, have also become a big part of the EM credit toolkit, right? They allow investors to take broad EM exposure when the underlying cash bonds are less liquid or harder to access. And we've seen usage continue to grow. How do you see ETF growth shape your market?

James Banghart: So for us, we use ETFs generally to hedge a lot. I mean, much more than we would have sort of two or three years ago. So traditionally, we would have used CDS indices. CDXEM is the main one in the EM or you use crossover or high yield in the States. The challenge of that is your trading basis. So in the end, you're basically buying protection or selling protection depending on which way you're going, but you're managing a bond portfolio against that. So you're running an inherent product basis. Whereas the ETFs are a good way to manage that because in the end, you're basically trading bonds. And particularly with rate vol being probably the one underlying or the main underlying characteristic that we've seen in the last 18 months, it's important to have a like for like hedge. So in that sense, it's quite good from ETF.

The thing with EM that's a bit more challenging is your liquidity of EMB is still versus the DMNC is still lower. So like the actual penetration rate is lower, but we still, you know, as I say, for us, if I look at what our hedge breakdown looks like, we probably use ETF is probably 75% of our hedge now versus where it used to be 75% synthetics. It's becoming much more of a base case for our overall usage. It comes up and down, depending on where rates are, you know, now with rates being a bit higher, we'll probably use synthetics a bit more because cash demand is much stronger with higher rates. But it gives you another way to hedge and a different way to hedge, which is quite useful.

Meridy Cleary: ETFs continue to be a big theme. As we know, the new EU and UK bond transparency rules are now live. Obviously a major topic here in Europe, December 2025 for the FCA, the UK rules and March 2026 for the EU post-trade bond transparency rules. So obviously these have significantly increased the availability and speed of information on sovereign and corporate bond trading activity. And one of the focus points is how this could impact EM credit trading. How do you see us using the data? How do you see, synthesizing the significant increase in data? Do you think this will benefit EM trading?

James Banghart: Yeah, I think, you know, it's been interesting. So between Europe and the UK, it will cover sovereigns, which, you know, in addition to corporates, which, you know, the sovereign market in EM, it's pretty transparent and it's pretty liquid. So the impact is probably negligible. You know, given the amount of, you know, electronification, the amount of, you know, IDB, inter-dealer broker penetration, like all of that means transparency in price on sovereign space in particular is pretty fluid. And because it's liquid, the transparency doesn't matter as much as far as pricing. In the corporate market, it's different because you've got a much less liquid market where, you know, if you're quoting something 1 million by 1 million and someone comes in and they want to sell 10 million, if you have pure price transparency, it makes it very tough to do the 10 million print.

So what we saw in TRACE, when TRACE was rolled out, the market became, the ticket sizes became smaller, the market became more fragmented, liquidity got worse. So there's a trade-off. So liquidity versus transparency and what's the optimal, you know, it's sort of depends on, it's in the eye of the beholder, I guess, and where you fall in that continuum. But when we look at, you know, it's still early days, as you say, for UK and Europe, I think we're, you know, we're sort of waiting to see how it plays out is do you see sort of a bit of movement in flows depending on where transparency is. So you may see flows into UK versus Europe because the reporting rules are different in the UK versus Europe. As we see in the U.S. versus TRACE, when we see some trades happen in U.S., during U.S. hours versus some trades that happened in Europe away from the trades prints. So, you know, it remains to be seen how that'll be playing out. I think, you know, when we get the data, as you say now, so we do see the data, we still, you know, it's so much information that comes through the usability, that's still early stages. So we're, you know, we're sort of looking at how we integrate that in our daily trading.

Meridy Cleary: Definitely. And we're tracking that development as well. And it will take time for behavioral shifts to take shape, but definitely something that we're on top of. And I guess staying on how, you know, the market continues to evolve, I guess, if we shift from public markets more to the private side, another buzzword has been, of course, private credit. Have you seen a push to private lending in EM?

James Banghart: Yeah. It’s a good question. So the private credit has been something that, like certainly when the U.S. and you saw DM frameworks, it's for the last, I guess, two or three years has been a major focus point and really in the last 18 months, I'd say. The U.S. market, we don't have the same dynamic in EM because the U.S. private credit became, is really a regulatory construct. You had basically the role of post-GFC of G-SIB and Basel III and all that, made it much more expensive for banks to retain the risk in a lot of these private loans. Obviously banks still do this. It's a core bread and butter process that banks do. But as the, you know, as the costs got much higher to hold on balance sheet, the push was to, from banks was to push to move it off balance sheet or move it into a different market, which is then puts the birth of private credit. So private credit in the DM market has been growing since the GFC and it's been growing obviously much quicker in the last three to five years, I'd say. And, you know, that probably will continue.

In EM, we are still largely a bank-driven market. So if you go in any of these jurisdictions, it's still, the banks are still probably the biggest overall lender into the corporate space. I think that will continue because there's no real onus from a regulatory or capital rules perspective yet. That may change over time. The biggest thing we see is that in each jurisdiction and the interesting thing about EM is it's very different. So whether you're in India or you're in China, you're in Brazil, you're in Mexico, South Africa, like they're very different local markets in terms of why the local credit market exists, what form it exists and how. And all those trades are bespoke.

So every trade is unique. Like, you know, there are new term sheets or new structures and everything's quite novel, which is quite interesting versus the U.S., which can be much more formulaic. But, you know, the evolution is going to be, will be interesting to see how it plays through time. It's, EM is still growing. You know, I think on EM, the other thing we have is we have sovereigns that also borrow in the private market, generally in repo format, but it's another access to capital that, you know, otherwise they may not have. So it's a good sort of liquidity source for them that's different than the public bond market. It gives them sort of more flexibility. But yeah, I mean, private credit it's there, it's more fragmented EM, it's much more local dependent. So every market's different. It's growing, but it's growing at a different pace.

Meridy Cleary: James, thank you so much for joining us today. We've covered a lot of ground from how geopolitics can test liquidity to how new trading protocols, technology, and greater data availability are reshaping the EM credit landscape. Thank you so much for your time.

James Banghart: Thanks for having me, Meridy. Thank you.

Meridy Cleary: To our listeners, please stay tuned for more FICC Market Structure content on this channel. And please reach out to your J.P. Morgan sales representative should you have any questions about what we discussed today. Thank you very much.

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