Newsletter · 2026-09-25 · Ashutosh Agarwal

The Bond Selloff Finally Reaches Emerging Markets - EM FX Weekly - Week of September 25, 2026

EM FX Weekly for the week of September 25, 2026 (podcasts recorded roughly September 20 to 25): a US-driven bond selloff sent the 10-year to 5.15% and finally spilled into emerging markets, with J.P. Morgan's local-bond index giving back more than half the year's gains and its EM desk calling carry drivers priced to perfection, while State Street argued positioning is not yet crowded and the new shock is diesel, not crude.

EM FX Weekly

Week of September 25, 2026: The Bond Selloff Finally Reaches Emerging Markets

For most of this year, emerging-market currencies behaved like the calm kid in a noisy classroom. US yields jumped, the Fed hiked, the dollar found its footing, and EM mostly kept its head down and collected interest. This week that calm cracked a little.

The trigger wasn't anything happening in Brazil or Turkey or South Africa. It was America. Blowout US business surveys, a weak Treasury auction and a reported US plan to ban diesel exports sent the 10-year Treasury yield to 5.15% and the 30-year to its highest since 2004. J.P. Morgan's EM team says its local-bond index has now handed back more than half of this year's gains since late August, and that EM currencies, for the first time in a while, started to lag the euro.

Nobody on the podcasts this week called the end of the EM carry trade. State Street's macro head spent a whole episode arguing that positioning isn't stretched. But the tone changed. The word you kept hearing was not "carry on." It was "priced to perfection."

TL;DR

The global bond selloff hit EM this week. J.P. Morgan's benchmark EM local-bond index is down about 2.2% since its late-August peak, giving back more than half the year's gains. EM currencies, which had held up, started to "wobble" and lagged the euro in the last few sessions.
The new shock is diesel, not crude. A reported 90-day US ban on diesel exports landed on the countries that import the most refined fuel: J.P. Morgan named Chile, South Africa, the Philippines and Mexico, with Chile and Peru the most reliant on US diesel.
US yields broke higher. The 10-year hit 5.15%, the 30-year 5.47% (highest since 2004), and the 5-year topped 5% for the first time since 2007, per NAB's Morning Call. Odds of another Fed hike in October jumped from about 50% to about 70% after hot US business surveys.
The carry trade is not crowded, says State Street's Tim Graf, but conditions are "hard to imagine" getting better. EM carry earned about 10% over the past year with only 4-4.5% volatility. The warning sign is that high-yield EM currencies are moving less in step with each other than at almost any point in 20 years, which is the kind of quiet that tends to come before a storm.
Trump-Xi was a low-key affair. The tariff truce was pushed out to January 10. Expectations were "very low," according to former US trade representative Michael Froman on Bloomberg Surveillance.
Turkey got real airtime for the first time in weeks. A fund scandal (a $6 billion redemption request at one fund in a single day, 131 funds with $18 billion frozen) has not dented the lira carry trade. The FT's man in Istanbul says the only number that matters is the central bank's reserves.
Oil went back up. Brent climbed back to about $106.6 (touching $108) on Houthi missile fire at Saudi Arabia and stalled Iran talks, after briefly dipping under $99 early in the week.

What's new

J.P. Morgan's EM desk: "priced to perfection," and the diesel ban is why this week hurt. The most important EM podcast of the week was J.P. Morgan's EM Fixed Income: Navigating some sudden market turbulence on At Any Rate, recorded September 24. Host Aneska Kristuvova, who heads EMEA EM and local-markets strategy, opened bluntly: "It has been a rather difficult week in markets, particularly for EM local markets." The GBI-EM local-bond index peaked at the end of August and is "down about 2.2%" since. "We're still up on the year, but we've given back more than half of the performance."

What's new is the shape of the pain. For most of September, she said, EM was just catching the spillover from US yields, and most EM currencies were still beating the euro month-to-date. That changed in the last couple of sessions: "EMFX underperformed the euro, and some of the rates market sales were larger than in the US." In plain English, EM stopped being a bystander and started taking hits of its own.

Her explanation is the reported US diesel export ban. J.P. Morgan has argued for months that crude oil, adjusted for inflation, isn't high enough to choke growth. Refined fuel is a different story: "In real terms, product prices show a lot more pressures than outright crude." She said that "without that we would have not nearly performed as poorly as we did." The countries most exposed are the ones that import the most refined fuel: "Chile, South Africa, Philippines, Mexico." On direct reliance on US diesel, "Chile and Peru look to have a larger reliance."

Then came the part that matters most for anyone holding the trade. The desk's 2026 stance has been neutral on EM rates and "constructive on FX," built on a reflation backdrop that is usually "quite okay for FX, particularly for carry plays." But now, she said, "it does seem to us that markets have come to a point where a lot of these drivers are priced to perfection, and the macro environment feels a lot more uncertain." EM local yields have sold off by more than one standard deviation, and the desk's own models showed EM currencies about one standard deviation "too strong" relative to their drivers. That is not a sell call. It is a desk that liked carry all year now saying it can see both ways out.

EM dollar bonds gave back half their year, and the high-yield names finally cracked. Same episode. Ben Ramsey, head of EM sovereign credit strategy, said the EMBI Global Diversified (the main index of EM government bonds sold in dollars) has also "given back about half of the returns" it earned through the summer. Spreads, meaning the extra yield over Treasuries, have stayed tight. The losses have come mostly from Treasuries themselves. His description of the last day and a half: "I wouldn't call it disorderly, but a little less comfortable." The weakest names were Argentina, Ukraine and Venezuela, plus longer-dated investment-grade bonds from Chile and Mexico, where Pemex drags the complex. Oil importers Pakistan and Sri Lanka actually did well. Last week's hope that "the Fed [would] put a ceiling on the long end of the Treasury curve" and EM could "grind tighter" has been, in his word, "upended" for now. His reassurance: spreads are still tight enough that "we're not really worried about refinancing risk," and fundamentals and buffers are better. His read is that this "feels like a shakeup, maybe some cleansing in positioning."

Viye M. Hong, head of EM corporate credit strategy, said EM company bonds (the CEMBI index, at around 150 basis points of spread) have held up better thanks to shorter maturities, with airlines the weak spot. The one country to watch on higher local rates is Brazil, where "the main contributors to our year-to-date defaults" have come from a couple of large issuers. From J.P. Morgan's record-attendance frontier-markets conference in London, Hong brought back an interesting mood reading. Investors are comfortable with fundamentals but have "much less conviction" on the big macro drivers: rates, geopolitics, AI. Still, "there's definitely a bias still towards adding high yielding assets, especially for carry, including frontier." Investors credited "stability in USD" for that comfort, and with currencies already rallied, the focus has shifted to "front end carry."

State Street: the carry trade isn't crowded, but it's suspiciously quiet. If J.P. Morgan explained why EM hurt this week, Tim Graf, State Street's head of macro strategy for Europe, asked whether it could get much worse. His Street Signals episode, There's Something About Carry (September 24), is the clearest explainer of the trade we've heard all year. A carry trade means borrowing in a currency with low interest rates, classically the Japanese yen, and parking the money in one with high rates, like the Brazilian real or Mexican peso, then pocketing the difference. It works "as long as the currency pair doesn't move too far against you." The risk, he noted, is why it's likened to "picking up nickels in front of a steamroller."

The numbers explain why so many people are doing it. The Bloomberg EM-only carry index has earned about 10% a year over five years with roughly 9% volatility. Over the last 12 months it earned "again 10%" with volatility of just "4%, 4.5%" and a maximum drawdown of about 4%, against 3-4% on Treasury bills.

So is it too popular? Graf went through State Street's positioning data, which tracks what real-money investors actually hold. His answer was mostly no:

Funding side: institutional investors are underweight the yen, but less than a few weeks ago, after they "turned from sellers to buyers" following Japan's recent intervention. Hedge funds, who were heavily short the yen, "are actually slightly long" now. Swiss franc shorts are small.
High-yielder side: speculators hold a big net long in the Mexican peso, "pretty large relative to history," and in the Australian dollar. But of the top seven or eight EM yielders, real money is overweight only two: the Turkish lira (73rd percentile of the last five years) and the Indonesian rupiah (69th percentile). They are neutral the Hungarian forint, Mexican peso and Indian rupee, and actually underweight the Brazilian real and South African rand.
Flows this week: renewed yen selling, buying of Hungary and Indonesia, lighter flows into Turkey, and "institutions are starting to sell Brazil ahead of the elections."

What bothers him is correlation, meaning how closely these currencies move together. The average correlation among seven high-yield EM currencies "is near its lowest level in 20 years." Part of that is healthy: markets now treat Turkey's risks and Brazil's risks separately rather than lumping all carry together. But combined with record-low volatility and cheap options, it is the Minsky setup of "stability begets instability." His conclusion: "I have no real reason to think that a blowup of carry trades is imminent, but... it's kind of hard to imagine conditions getting better for carry in the coming weeks than they already are. Rates, after all, are rising pretty much everywhere."

"It's kind of hard to imagine conditions getting better for carry in the coming weeks than they already are." (Tim Graf, State Street)

Two smaller points worth noting. Implied volatility (the options market's forecast of future swings) is elevated only in a handful of places: the yen because of intervention risk, the Korean won, and Brazil, where there is "election risk premia." Graf also flagged a Bank for International Settlements study on leveraged ETFs tied to SK Hynix and Samsung and the "inherently huge swings" they create in Korean equities. It was the closest thing to a won story on the podcasts this week.

US yields broke through 5%, and the dollar got its "exceptionalism" back. The engine behind all of this was the US bond market, and NAB's Morning Call tracked it day by day. On PMIs push bond yields higher, AUD a victim (September 23), NAB FX strategist Ray Attrill said US business surveys "blew the lights out": services 58.7 from 55.8, manufacturing 57 from 53.7, with reports of supply bottlenecks, price pressures and trouble hiring. The 10-year jumped 16 basis points to over 5.1%. The 5-year topped 5% "for the first time since 2007" after a weak auction: foreign and central-bank-type buyers took just 54%, dealers took more than usual, and the auction "tailed" by 3 basis points (it had to pay more yield than expected to sell). Market odds of a Fed hike in October, a week before the midterms, went "from just over 50% to closer to 70%."

Attrill's read on the dollar is the one EM investors should worry about most. A hot US economy against a slower world "plays to... the familiar narrative about exceptionalism... If anything, perhaps the US is pulling away from the rest of the world. And that is a classic recipe for US dollar strength." Even with the ECB also talking about hikes, "a hike from the ECB is not as significant as a hike from the Fed, at least as far as currency markets are concerned." The dollar rose 0.5% that day. The Australian dollar fell 1.1% to below 70.4 US cents.

The next day, on The V Word (September 24), host Phil Dobbie and NAB's Taylor Nugent reported the 10-year at 5.15% and the 30-year at 5.47%, "the highest since 2004." A Treasury bond buyback meant to calm long-term yields bought just $4 billion of a $6 billion target. Nugent: "if this isn't the week you do the full $6 billion, then what is?" Four Fed officials (Paulson, Hammack, Williams, Barkin) all sounded hawkish, and Williams called another hike before year-end "a reasonable starting point."

Trump-Xi: pageantry, a truce extension, and not much else. The summit this newsletter flagged as the week's big China catalyst turned out to be mostly ceremony. NAB's Nugent confirmed the tariff truce "would extend until January," pushing back the November tariff increases, and said it was not "a huge surprise." On UNGA, Trump-Xi, and a Global Bond Selloff (Bloomberg Surveillance, September 24), former US trade representative Michael Froman of the Council on Foreign Relations said "expectations are very low," with "a lot of pomp and circumstance, a lot of dinners, a lot of parades." Treasury Secretary Bessent had already announced "a short extension" of the trade truce by "a couple of months beyond November." Froman expected talks on Chinese purchases of farm and energy products, since China "haven't followed through on some of the previous commitments," plus a new AI dialogue and a close watch on anything said about Taiwan. Stanford's Elizabeth Economy pushed back on the idea that Xi holds all the cards, pointing to a G20 vote on Chinese overcapacity that went "19 to 1, with China being the only holdout."

Attrill's take on the September 23 Morning Call summed it up: "as low-key as I think President Xi can probably make it... Never interrupt your opponent when he's making a mistake." For the yuan, a non-event is a good event. Beijing ran the currency firm into the meeting and got the truce extension it wanted. The podcasts did not discuss the yuan's move after the summit.

The yen: rate checks near 158, and a BOJ that the market doesn't believe. On Markets not convinced by BoJ hike (NAB Morning Call, September 20), NAB's Sally Auld explained why the Bank of Japan's hike weakened the yen. The two dissenters in the 7-2 vote were "recent appointments by the Japanese Prime Minister," and Governor Ueda "didn't appear to have enough resolve" to convince markets that Japan's negative real rates (interest rates below inflation) will end. Dollar-yen pushed "up towards that 158 level in early London trade," then the yen bounced when news services reported "rate checks," which markets read as a sign that Japan's Ministry of Finance is getting ready to intervene. Auld pointed out that a Japanese holiday meant thin markets, so "any threat to intervene might have more outsized reactions." By the September 23 episode, Attrill's verdict was that "political pressure on the BOJ is going to continue to be a constraint... which in turn... is keeping the Japanese yen particularly weak." For carry traders, a yen held down by politics is a funding currency that stays cheap. The risk is that the Ministry of Finance, not the BOJ, decides when that ends.

Turkey: a fund scandal, and a carry trade that doesn't care. The lira finally got some airtime. On the FT's Unhedged, Turkish dismay (September 22), host Rob Armstrong talked to the FT's Istanbul correspondent, John Paul, about a run on Turkish investment funds. One fund received "$6 billion of redemption from one of these funds... in one day" and couldn't pay, and the panic spread. Authorities moved quickly: the central bank loosened loan-collateral rules to limit forced selling, the stock exchange added stop-losses, and two major banks were appointed to liquidate the funds. That leaves "131 funds with a notional value of $18 billion," with recovery estimates of "20 cents on the dollar." The Capital Markets Board had privately warned in December that some fund prices were "fictitious."

Does the carry trade survive? "Totally, totally. If inflation, say, is 30 percent and... you're on a lira deposit, say, you're getting 42 percent, so that's a 12 percent return, bingo." The number to watch "is not the stock market, it's reserve levels. And while reserve levels are high, that trade will be safe. Turkey doesn't want an uncontrolled devaluation because the exchange rate is a inflation anchor." He noted the split in Turkish markets: equities feel like the "Wild West," but "debt markets and the foreign exchange market, everything is super smooth, very regulated." On TV news, the exchange rate is "the most closely watched figure in all of Turkey." Put this next to Graf's data (real money still overweight the lira, but flows lightening), and the lira story is clear: a managed, high-yield carry trade that holds as long as the central bank has the reserves to defend it.

Mexico: Washington calls Mexico "quite pragmatic" on USMCA. This one comes from a primary source rather than a pundit. On Bloomberg Talks (September 21), US Trade Representative Jamieson Greer drew a sharp contrast with Canada: "If you look at Mexico, they've been quite pragmatic. We've had a lot of quiet conversations... They've made a lot of changes. Today they announced that they're going to have an aluminum monitoring system." The sticking point for the USMCA renegotiation is transshipment: "If China or Vietnam are sending goods into Canada and Mexico, fashioning them somewhat into additional goods and sending them into the US... That's not the point of USMCA." For the peso, that counts as a friendly tone from the person running the talks. That matters given Graf's data showing speculators hold a historically large long position in the peso. The podcasts did not discuss Banxico this week.

The investment strategists: higher for longer, and a 2022-style warning. Two episodes of Monetary Matters with Jack Farley gave the bear case its intellectual backbone. On Why the Fed May Have to Hike Far Higher Than Expected (September 24), GMO senior investment strategist Henry Peabody argued that rate hikes aren't biting where they used to. Private credit and fixed-rate corporate bonds have "loosened the connection between policy and the actual economy," so big companies and AI borrowers keep borrowing while consumers and weaker borrowers get squeezed. With the policy rate at "basically 3.9 percent" and the Fed projecting 4.1% by year-end, his risk case is "higher than we expected for probably longer." A useful dollar aside: he described the dollar as "at a sort of near-term local low, although it's rich on a real effective exchange rate basis" (expensive once you adjust for inflation differences). He also mentioned talk of tapping "emerging debt markets for housing AI data centers," which matches J.P. Morgan's report of investor unease over AI-related bond supply.

On Energy Shock and Rate Hikes Could Cause a 2022 Style Bear Market (September 23), Clocktower Group's Eric Wallerstein put it more starkly. Oil is "literally double what it was" in January and February, and "we literally tighten monetary policy everywhere to try to combat it, which is a terrible recipe for growth." The US is "kind of okay in a supply shock" as an energy exporter, but "Europe is not okay in this kind of energy crisis," with the risk of outright recession "because we can't grow because we don't have the inputs." His ingredient list for a 2022-style bear market: "Same as it was then: energy shock, excessive valuations, central bank tightening globally," plus fiscal drag. He noted that markets price about five more hikes in Canada despite weak growth, a sign of how far rate expectations have moved from fundamentals. These are investment strategists' views, not trading-desk calls, but they explain why the mood shifted.

The debate

Both sides got a real hearing this week. What changed is that the bear case now has live evidence behind it.

The bull case: carry still pays, and the crowd isn't all-in. State Street's Graf gave the strongest version. EM carry has earned 10% with 4-4.5% volatility over the last year, well above T-bills. Positioning is not extreme: hedge funds are no longer short the yen, real money is overweight only Turkey and Indonesia, and not by much. At J.P. Morgan's frontier conference, investors still had "a bias towards adding high yielding assets, especially for carry." Fundamentals are sound: Ramsey isn't worried about refinancing risk and sees "bigger buffers." The Trump-Xi truce extension removed a November tariff cliff, Mexico is getting friendly words from the US trade representative, and a BOJ held back by politics keeps the yen cheap to borrow. Turkey's lira carry, as the FT's correspondent put it, is safe "while reserve levels are high."

The bear case: yields are breaking, the dollar has an exceptionalism story, and the calm is the risk. J.P. Morgan, which liked carry all year, now says the drivers are "priced to perfection," with EM local yields down more than a standard deviation and EM currencies looking "too strong" in its models. The EM local index has given back half its year in four weeks. The diesel shock hits specific importers (Chile, South Africa, the Philippines, Mexico) directly. NAB's Attrill says a US "pulling away from the rest of the world" is "a classic recipe for US dollar strength," and October hike odds are near 70%. Graf's own warning is that correlations are the lowest in 20 years and options are cheap, the kind of calm that tends to come before a break, and "rates... are rising pretty much everywhere." GMO's Peabody and Clocktower's Wallerstein describe a Fed that may have to go further, and a global tightening into an oil shock that looks like 2022.

Where they agree: nobody said a blowup is imminent. Graf: "no real reason to think that a blowup of carry trades is imminent." Ramsey: "not disorderly." The argument is about direction, not a crash.

The trades in play

Carry: stay in, but shorten and pick your spots. J.P. Morgan's investors are focused on "front end carry," meaning short-dated local instruments where you earn the interest-rate gap without much exposure to longer-term bonds selling off. That fits a week when longer EM bonds (EMBI) lost more than shorter company bonds (CEMBI).
Sort by diesel exposure. The refined-fuel shock splits EM. J.P. Morgan flags Chile, South Africa, the Philippines and Mexico as the biggest refined-product importers, and Chile and Peru as the most dependent on US diesel. Oil importers that had been doing well (Pakistan, Sri Lanka) are the other side. If the diesel ban is confirmed or extended, the Chilean peso, the rand and the Philippine peso are the most exposed. If it's dropped, they have the most to recover.
Cheap insurance. Graf says puts on EM currencies (options that pay if they fall) look cheap relative to calls, though "more normal" once you account for how low volatility is. "If vol spikes, they're going to look very attractive." For anyone long carry, this is an inexpensive time to hedge.
Brazil ahead of the vote. Institutions are "starting to sell Brazil ahead of the elections," real money is already underweight the real, and options already carry an "election risk premia." This is an event trade on the October vote. Watch who moves first.
Mexican peso: friendly politics, heavy positioning. Greer's "quite pragmatic" is supportive, but speculators' peso long is "pretty large relative to history," and Mexico is on the diesel-importer list. The upside is a USMCA deal. The risk is a crowded exit.
Turkish lira: watch reserves, nothing else. A 42% deposit rate against roughly 30% inflation leaves a real return of about 12%, per the FT's correspondent. Real money is overweight (73rd percentile) but flows are "lightening up."
Dollar-yen near 158: the Ministry of Finance is the trigger. Rate checks were reported as dollar-yen neared 158. A weak yen helps carry funding until Japan actually intervenes. A real intervention is the most likely source of a sharp carry scare.
Next data points: the RBA decision next week (priced about 90% for a hike, per NAB); the Fed's October meeting (hike odds about 70%); the September 30 core PCE revisions; confirmation or reversal of the US diesel export ban; the Brazil election; and whether 10-year Treasuries hold above 5%.

Read-throughs

EM local debt (EMLC-style exposure): the GBI-EM index is down about 2.2% from its late-August peak and has given back more than half of 2026's gains. J.P. Morgan's desk is neutral on local rates and turning more cautious on its "constructive" FX view.
EM dollar debt (EMB): the EMBI Global Diversified has also given back about half its year, mostly because of Treasuries, not wider spreads. The high-yield laggards are Argentina, Ukraine and Venezuela, and longer-dated Chile and Mexico/Pemex debt has underperformed. EM company bonds have held up better.
EWY / Korea: the BIS points to leveraged single-stock ETFs on SK Hynix and Samsung as a source of outsized equity swings, and won implied volatility is one of the few elevated spots in EM FX (State Street).
EWZ / Brazil: institutions are selling ahead of the election, Brazil has been the main source of EM corporate defaults this year, and options price in election risk.
EWW / Mexico: a friendlier tone on USMCA from the US side, offset by diesel-import exposure and heavy speculative peso longs.
EZA / South Africa: listed among the biggest refined-product importers. Real money is underweight the rand, which cuts both ways: there's less crowding to unwind, but also less support.
TUR / Turkey: the fund scandal is contained to equities. Debt and FX markets are "super smooth." Reserves are the gauge.
Brent and diesel: Brent back to about $106.6 (high of $108) on Houthi missile attacks on Saudi Arabia. Red Sea tanker insurance rose from 1% to 3% of a vessel's value, or $3-7 million a trip, as high as insuring through Hormuz (NAB). US retail diesel is at $6.50 a gallon. For EM, refined fuel, not crude, is now the channel that matters.
AUD as a China proxy: the Aussie dropped from about 71.2 US cents to below 70.2 over the week, despite the RBA being close to a certain hike and a smooth Trump-Xi truce extension. It traded as a victim of US yields rather than a China signal.
EUR/USD and CE3: strong eurozone business surveys "didn't provide a modicum of support for the euro." French-German 10-year spreads hit 110 basis points, the widest since 2012, and German state-election losses put pressure on Chancellor Merz. A weak euro is a headwind for the Polish zloty, Hungarian forint and Czech koruna, though State Street did see institutional buying of Hungary this week.
Broad dollar: NAB sees US exceptionalism back in charge. GMO's Peabody says the dollar is near a short-term low but still expensive once you adjust for inflation.

What changed

The 10-year didn't hold below 5%. Last week it sat at 4.95%. This week it hit 5.15%, and the 30-year hit 5.47%. J.P. Morgan's "Fed caps the long end, EM grinds tighter" idea is, in Ramsey's word, "upended" for now.
"Keep calm and carry on" became "priced to perfection." Last week J.P. Morgan's FX team told clients carry would outperform. This week its EM team said the drivers look fully priced and the outlook "a lot more uncertain."
Oil went back up. The cool-off to about $103 reversed. Brent is back near $106.6, and the new pressure point is diesel, which J.P. Morgan says caused most of the week's EM damage.
Trump-Xi resolved as a non-event. The truce runs to January 10. The November tariff cliff is gone for now.
The yen fight moved to the Ministry of Finance. After the dovish BOJ split, the story is rate checks near 158, not BOJ hikes.
The crowding question got data. State Street's positioning figures show the carry trade is less crowded than its returns suggest, though correlations are at 20-year lows.
Turkey and Mexico returned. The lira (via the Unhedged fund-scandal episode) and the peso (via the US trade representative) got real airtime for the first time in weeks.