Muzinich Weekly Market Comment: Ten Reasons for Emerging Market (EM) Credit
Insight
February 23, 2026
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Last Monday was Presidents’ Day in the US, while much of Asia was closed for the week celebrating the Lunar New Year (Year of the Fire Horse), and in Europe, school half-term holidays further lowered trading liquidity.
As is often the case when liquidity fades, price action becomes mixed. Last week, both government bonds and the US dollar moved against consensus expectations, with government curves flattening, led by outperformance in Japan and the UK, where fiscal concerns remain elevated. Meanwhile the US dollar strengthened broadly against most global currencies.
Risk assets remained resilient, despite a pickup in volatility, with both the MOVE and VIX indices staying elevated, indicating rising uncertainty. Corporate credit had a good week, generating positive returns across the board, with EM credit outperforming in both investment grade and high yield universes. With Asian markets closed, European equity indices were the winners for the week.
The key development out of Asia was the release of the 2025 US trade report. The full-year trade deficit reached US$901.5bn, one of the largest on record, suggesting US tariff initiatives may not have been as effective as intended [1].
At a more granular level, however, the data shed light on how trade flows have been redirected. In 2025, the US trade deficit with China narrowed to its smallest level in more than two decades, now accounting for just 7% of total US imports, down from 13% in 2024, and over 20% prior to the introduction of President Trump’s first China tariffs in 2018. [2]
Meanwhile, trade deficits with Mexico and Vietnam reached record levels, while Taiwan’s trade surplus with the US nearly doubled last year, driven by a surge in semiconductor and electronic product exports. This reflects strong demand tied to artificial intelligence–related investment, with exporters benefiting from tariff exemptions. [3]
The most notable news from Europe was the rising diplomatic concern from the threat of a far-right candidate winning the French presidential election, prompting a discussion – according to the Financial Times – over whether it would be prudent to agree on a successor to European Central Bank (ECB) President Christine Lagarde alongside other senior EU appointments ahead of the April 2027 election. [4]
In the UK, a surprise rise in unemployment, [5] driven by youth unemployment reaching 16.1%, alongside an in-line but soft inflation report, with headline inflation falling to 3.0% in January from 3.4% in December, [6] is likely sufficient evidence for the Bank of England to cut policy rates in March. Overnight interest rate swaps now price an 82% probability of a 25 basis points cut. [7]
Meanwhile, in the Middle East, “no news is bad news,” as the standoff between the US and Iran continues. Iran is now expected to submit a written proposal outlining how it intends to resolve the outstanding issues from the last round of talks in Geneva. This uncertainty remains a key driver of rising energy prices in recent weeks, given that the Strait of Hormuz is the single most important energy choke point in the world. Roughly 20% of global oil consumption transits the strait each day, accounting for around one-third of seaborne oil trade and approximately 20% of global liquefied natural gas (LNG) exports, primarily from Qatar. [8]
In the US, key news came from the January Federal Open Market Committee (FOMC) minutes, which raised eyebrows. While there was broad agreement to keep rates on hold, several participants favoured two-sided guidance, including the possibility of further hikes if inflation remains above target.[9] This reflects heightened concern over inflation persistence and policy credibility. These concerns were reinforced by the December Personal Consumption Expenditures (PCE) report. The core PCE deflator, the Fed’s preferred inflation measure, rose 0.36% month-over-month. On one, three and six-month annualized bases, core PCE accelerated to 4.3% (vs. 2.0% prior), 3.1% (vs. 2.4% prior) and 2.9% (vs. 2.7% prior), respectively. [9]
If there has been one trend that has continued unabated over the past six months, it is renewed investor appetite for EM credit. After being in the wilderness since the Covid period, EM credit is back in favour. Why now? Below we suggest ten reasons.
Ten Reasons for EM credit
1. Exploit favourable positioning: While many asset classes are crowded, EM credit remains under-owned, providing asymmetric risk-reward, cushioning downside and offering outsized upside.
2. Unrivalled technical tailwinds: The Asia credit universe is structurally shrinking due to negative net issuance, driven by cheaper domestic funding. This creates a “scarcity premium,” where demand consistently outstrips supply, supporting bond prices.
3. Insulation from AI disruption: The EM credit universe has limited exposure to software and hyperscaler capital expenditure, reducing vulnerability to AI-driven business disruption and providing a safer harbour against AI-related volatility.
4. Own what the world needs: EM regions sit at the heart of global industrial demand. EM remains the “factory and miner” for the world: Asia manufactures semiconductors and batteries, while Latin America and the Middle East and Africa are dominant commodity and mineral producers.
5. True global diversification: EM credit offers broad sovereign and corporate diversification, with no single sovereign dominating, that is, no sovereign exceeding 10% - reducing concentration and tail risks.
6. Capture the world's growth engine: Asia is projected to grow at 4.5%,[10] significantly outpacing the rest of the world. Investing here means capturing the fundamental credit strength fuelled by superior GDP performance, supporting credit fundamentals, balance sheets and earnings durability.
7. Position for the rebirth of non-technology trade: As fear of tariffs fades and global supply chains are reconfigured, this allows for the normalization of trade beyond technology. Asia – which sits at the epicentre – and Eastern Europe will be key beneficiaries.
8. Superior spread per unit of leverage: Simply put, you get paid more for the same risk. EM corporates frequently boast cleaner balance sheets and lower leverage ratios than their developed market (DM) peers, yet they offer higher spreads for the same credit rating: an investment grade portfolio with a high yield spread.
9. A practical way to invest in Japan’s reflation: As Japan’s economy revitalizes, the ripple effects are felt most strongly across the Asian credit universe. Investing in Asian credit is an effective way to capture regional growth and intra-Asian trade flows linked to Japan’s recovery.
10. Benefit from a weaker US dollar: A softer dollar reduces USD funding costs, eases financial conditions, and improves debt service capacity across EM. It also boosts local purchasing power, supporting domestic, commodity and high-yield sectors – creating a powerful tailwind for EM credit.
Past performance is not a reliable indicator of current or future results.
References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.
This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of February 20, 2026, and may change without notice. All data figures are from Bloomberg, as of February 20, 2026, unless otherwise stated.
References
[1] Bloomberg, “US Notches One of Its Biggest Annual Trade Gaps Since 1960,” February 19, 2026
[2] Fortune, Trump’s justification for the tariffs was rebalancing the trade deficit—it’s not going the way he wanted,” February 20, 2026
[3] Bloomberg, “Trump’s Tariffs Send US Trade Deficit With China to 21-Year Low,” February 19, 2026
[4] UBS Global Research, “European Economic Perspectives: ECB leadership change—implications,” February 18, 2026
[5] Bloomberg, “UK REACT: Surprise Jobless Rate Rise Means Earlier BOE Cuts,” February 17, 2026
[6] Bloomberg, “UK REACT: CPI Fall is Just the Start, 2% in Sight by Spring,” February 18, 2026
[7] Bloomberg, as of February 20, 2026
[8] US Energy Information Administration, ”About one-fifth of global liquefied natural gas trade flows through the Strait of Hormuz,” June 24, 2025
[9] Bloomberg, “US REACT: January FOMC Minutes Show Wider Backing for Rate Hold,” February 18, 2026
[10] The state council for the People’s Republic of China, as of 25th March 2025. “Asia remains key growth engine for global economy”
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