Global emerging-markets credit, rates and FX strategy Report Interpretation

Overview

This global emerging-markets weekly argues that AI-related hyperscaler borrowing is unlikely to create sustained crowding out in EM credit. It also reviews regional macro and market developments, with constructive views on KRW, Nigerian and Brazilian duration, and a cautiously bullish but less emphatic signal from BofA's EM external-debt sentiment tracker.

Core views

The report's central argument is that a prospective surge in hyperscaler, data-center and semiconductor borrowing should be a headwind rather than a threat to EM credit. Although planned borrowing could materially increase US investment-grade supply in 2026, BofA notes that the market has already absorbed substantial AI-related issuance: the new issuers' bonds have cheapened, while broader US investment-grade spreads have remained relatively stable and EM sovereign spreads remain near cycle tights. The report argues that genuine supply-driven crowding out would have produced broad credit-spread widening rather than pressure concentrated in the new issuers. BofA attributes EM resilience to continued demand for high-quality income assets, attractive all-in yields, expanding pension and insurance assets, and demographics. It also cites supportive EM technicals: many sovereigns front-loaded funding earlier in the year, leaving lower future financing needs, while private placements, euro issuance and domestic markets reduce direct competition with US-dollar IG issuance. Improving sovereign rating momentum, fiscal positions and balance sheets reinforce the argument. Hyperscalers, largely rated AA or AAA, also compete for a different investor segment than low-BBB EM sovereigns, which offer higher yields, longer duration and diversification. BofA forecasts big-four hyperscaler issuance of about $310bn in 2026, declining to $215bn in 2027 and $125bn in 2028, suggesting the supply shock may be front-loaded. In Asia, the report expects the September 24 Trump-Xi summit to preserve stability rather than deliver a major breakthrough. Its base case is a one-year extension of the existing trade truce, retaining agreed tariffs and suspending new export controls beyond the November 10 expiry. It expects limited progress on advanced-chip access and existing export controls, though additional Chinese purchases of US goods and product-level tariff reductions on around $30bn of non-sensitive goods on each side are possible. BofA is constructive on the Korean won after a 13.3% appreciation against the dollar since late July, with USD/KRW falling from above 1,550 earlier in the year to a low of 1,334. It links the move to record external support and a shift in balance-of-payments dynamics: non-financial corporates sold net $187bn of foreign exchange in 1H26, including $110bn in 2Q26, versus $58bn a year earlier. Korea's current-account surplus reached a record $42.1bn in July, while foreign equity flows turned positive for the first time since April 2025 and foreign purchases of Korean debt totaled $2.1bn in July. The report says exporter conversion, semiconductor receipts, repatriation flows, shipbuilder hedging and index-related bond inflows support KRW, but flags renewed overseas deployment of corporate cash and KOSPI volatility as risks. For Nigeria, BofA recommends long NIGB 31s on an FX-unhedged total-return swap at SOFR+90bp. The stated open yield is 16.6%, open spot is 1,331, the target is 6% total return and the stop is -3%. The rationale is that easing inflation and improving fiscal expectations should allow further monetary easing, with most expected return coming from yield compression rather than FX appreciation. BofA's excess-M1 framework points to a policy rate closer to 23% than the current 26.5%, consistent with its 200bp 2026-cut forecast. It estimates that an 89bp rally in the NIGB 31 yield would produce three-month total returns above those on three-month OMO bills. Mexico is a more cautious case. BofA says investment grade could be at risk within two to three years without stronger growth or fiscal consolidation, and retains an Underweight on EXD while favoring two-year TIIE receivers. It forecasts growth of 1.4% in 2026 and 1.6% in 2027, arguing that weak productivity, infrastructure and electricity constraints, regulatory uncertainty, tariffs and limited fiscal room could maintain a low-growth equilibrium. The report sees a possible separate US-Mexico deal before US midterm elections but expects USMCA uncertainty to remain and constrain long-payback investment. For Brazil, BofA expects a 25bp Selic cut to 13.75% and continued cuts through December 2027, forecasting 13.25% at end-2026 and 11.25% at end-2027, below both market pricing and consensus. It cites improving core inflation, weaker activity, rising delinquencies and a real policy rate near 9%. The report views election probabilities as the key driver of Brazilian assets and says elevated yields reflect high real yields more than inflation expectations: the five-year nominal yield is 14.3%, 310bp above its historical average, while the five-year real yield is 7.8%, 240bp above average. BofA estimates the five-year nominal yield is around 75bp above fair value and maintains an Overweight on Brazil EXD. It recommends an FX-hedged long in BNTNF January 2037 at 14.40%, targeting 12.50% with a 15.50% stop, on the view that a market-positive election result could support fiscal consolidation and compress term and fiscal risk premia. The BofA EXD Sentiment Indicator remains bullish but no longer signals an outright Buy. The tracker is -0.44, versus a Buy threshold below -0.5, and combines six equal-weighted metrics covering fund-return beta and persistence, issuance quality, new-issue pricing and type, and dedicated-fund flows. BofA finds the primary market relatively restrained: the average rating of new issuance is at its highest since October 2023 and inflows have declined, indicating cautious positioning. However, recent lagging by funds that led over the prior six months and an EM-high-yield-versus-US-high-yield richness signal raise early warnings of possible spread widening.

Analysis framework

BofA combines market-price and issuance evidence with credit fundamentals, funding technicals, balance-of-payments data, policy forecasts and relative-value analysis. It also uses proprietary quantitative trackers for EM external-debt sentiment, rates fair value and CTA positioning, then translates those findings into country and instrument-specific trade views.

Methodology notes

• Industry AnalysisSupply-demand framework

  Credit-market supply-demand analysis

  The report tests whether hyperscaler issuance is displacing EM demand by comparing issuance, spreads, investor demand and funding channels. Its conclusion is that broad market evidence does not yet show material crowding out.

• Fixed Income and CreditSpread analysis

  External-debt spread and relative-value analysis

  BofA assesses EM sovereign credit through spreads relative to ratings, peers and US credit, using spread tightening or widening as evidence of valuation and technical conditions.

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  BofA EXD Sentiment Indicator

  The indicator equally weights six fund-positioning, primary-market and flow metrics. Lower readings are associated with near-term spread tightening, while readings below -0.5 trigger an outright Buy designation.

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Scope 90 three-factor EM rates fair-value model

  The model uses macroeconomic and market variables to estimate local-rates fair value and identify where observed yields differ from estimated fair value.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EM sovereign external debt

  Broad asset class analyzed as resilient to hyperscaler-supply concerns.

  Strengths

  Supportive demand, front-loaded sovereign funding, improving fundamentals and differentiated investor demand.

  Weaknesses

  Potential periodic technical noise from AI-related issuance.

  Comparison

  EM BBB sovereigns offer higher yields, longer duration and diversification versus predominantly AA/AAA hyperscaler issuers.

  Risks

  Global rates, growth, geopolitics, oil prices and risk aversion.

• NIGB 31s

  Recommended long Nigerian local-government-bond position.

  Strengths

  Improving inflation and fiscal expectations, further easing potential and sensitivity to yield compression.

  Weaknesses

  Expected FX contribution is limited because spot is forecast to remain broadly unchanged.

  Comparison

  An 89bp rally could make three-month total returns exceed those from three-month OMO bills.

  Risks

  Renewed inflation pressure and fiscal slippage ahead of elections.

• BNTNF January 2037

  Recommended FX-hedged Brazilian duration position.

  Strengths

  High real yields, deeper-than-priced easing and asymmetric election-related upside.

  Weaknesses

  Sensitive to fiscal-risk premia and election developments.

  Comparison

  Entry yield 14.40%, target 12.50%, stop 15.50%.

  Risks

  A market-negative election outcome or a more restrictive Federal Reserve.

• Brazil external debt

  Overweight recommendation.

  Strengths

  Attractive valuation relative to ratings and potential for further spread tightening.

  Weaknesses

  Electoral uncertainty remains a central driver of risk premia.

  Comparison

  Brazil trades at about a 0.2-notch discount to its credit ratings versus a persistent premium in prior years.

  Risks

  Adverse electoral results, rising debt, weaker growth, fiscal expansion and elevated real yields.

• Mexico external debt

  Underweight recommendation.

  Strengths

  Trade integration with the US remains Mexico's strongest structural advantage.

  Weaknesses

  Low growth, loose fiscal conditions and limited room for policy error.

  Comparison

  BofA sees investment-grade status at risk in two to three years without faster growth or consolidation.

  Risks

  Lower growth, a wider deficit, Pemex liabilities, tariffs and rating downgrades.

Key data

• Big-four hyperscaler issuance forecast$310bn in 2026; $215bn in 2027; $125bn in 2028BofA forecast for Microsoft, Google, Amazon and Meta; issuance is expected to moderate after 2026.
• KRW appreciation since late July13.3%USD/KRW fell from above 1,550 earlier in the year to a low of 1,334.
• Korean corporate net FX sales$187bn in 1H26Compared with $58bn a year earlier; 2Q26 sales were $110bn.
• Korea current-account surplus$42.1bn in JulyA record level and around 350% higher year on year.
• Nigeria policy-rate comparison23% implied versus 26.5% currentBofA's excess-M1 analysis supports its call for 200bp of cuts in 2026.
• Brazil Selic forecast13.25% end-2026; 11.25% end-2027Below market pricing of 13.50% and 14.00%, respectively.
• BofA EXD Sentiment Tracker-0.44Bullish but above the -0.5 threshold for an outright Buy designation.

Impact & implications

BofA's main implication is that AI-related US credit supply may cause episodic technical pressure but should not, by itself, drive sustained EM-credit underperformance. The report favors select countries and duration expressions where easing cycles, elevated real yields or valuations support return potential, while distinguishing those opportunities from sovereigns facing low growth, fiscal stress, elections or financing risks.

Risks

• Hyperscaler issuance could still create periodic technical noise in credit markets.
• KRW support could fade if corporates redeploy cash abroad, while KOSPI volatility could renew portfolio outflows and hedging demand.
• The Nigerian bond view faces renewed inflation and fiscal-slippage risk ahead of elections.
• Brazil duration and EXD could be hurt by a market-negative election result or a more restrictive Federal Reserve.
• Mexico faces risks from persistent low growth, fiscal slippage, tariffs and potential rating deterioration.
• The EXD sentiment signal is weakened by fund-performance fatigue and EM high-yield richness relative to US high yield.

What to watch

• The scale and trajectory of hyperscaler, data-center and semiconductor debt issuance.
• Whether broad US investment-grade and EM sovereign spreads widen alongside new supply.
• Outcomes from the September 24 Trump-Xi summit, especially the trade-truce extension and export-control policy.
• Korean corporate FX conversion, portfolio flows, reserve accumulation and KOSPI volatility.
• Nigeria inflation, fiscal expectations and the pace of monetary easing.
• Brazilian election polling, Selic guidance and real-yield compression.
• The BofA EXD Sentiment Indicator relative to its -0.5 Buy threshold.