Global Markets Analyst EM Rates — Pull from Home, Push from Abroad

Economics Research 14 August 2026 | 11:10AM BST

EM Rates — Pull from Home, Push from Abroad

n EM local rates have enjoyed several years of resilient performance since the Mambuna Njie | Pandemic shock, but tight spreads to DM rates – now at some of the narrowest Goldman Sachs International levels of the past two decades – leave them at a crossroads. This convergence in Kamakshya Trivedi rates reflects both improved EM macro fundamentals and higher core rates, but | the key question from here is whether those fundamentals justify a further move Goldman Sachs International

lower in EM rates. n To address this question, we refresh our framework to evaluate the fair value of EM rates. Our model is focused on capturing inflation risks, growth risks, fiscal risks and spillovers from US interest rates in a panel setting. To do this, we leverage a set of short-term cyclical ‘gap’ variables and some more survey-based longer-term structural level variables. n In aggregate, EM local rates screen as broadly fair relative to the macro factors we capture. Elevated US rates constitute a material source of upside risk, but this is offset by local disinflation prospects and a resilient growth backdrop, both which have been supportive of lower rates. n Notwithstanding the aggregate pricing, we see room for significant compression in rates in LatAm and CEEMEA high-yielders. In those countries, the market prices a higher inflation premium than our model estimates, leaving most rates screening as cheap. The results from our exercise biases us towards receivers in front-ends or the belly of curves in BRL and HUF, funded by EM Asia low-yielders, such as THB, where inflation risk is underpriced on our estimates. We remain cautious on MXN and CLP front-ends given the potential for US rate spillovers. n Shifting fiscal trajectories remain an important driver for EM long-ends. While these risks remain balanced in aggregate, we prefer to express fiscal differentiation via curve steepeners in places where fiscal metrics are weak (ILS, RON, PLN) against flatteners where consolidation is on track (ZAR, INR) or could improve (COP).

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Goldman Sachs Global Markets Analyst

EM Rates — Pull from Home, Push from Abroad

EM local rates are at a crossroads. After several years of resilient performance post the Pandemic shock, spreads between DM rates and EM rates stand at some of the narrowest levels over the past two decades (Exhibit 1). This is partly a function of the move higher in DM rates as fiscal fundamentals have worsened in the US and Europe, but it is also a reflection of improved macro fundamentals across the EM rates complex, with sustained disinflation and a broad improvement in fiscal balances. So the key question from here is whether those improved fundamentals, in the context of ongoing global macro cross-currents, warrant a further move lower in EM rates.

Exhibit 1: EM Convergence – EM local rates have trended lower since the Pandemic while core rates remain elevated

Source: Bloomberg, Goldman Sachs FICC and Equities, Goldman Sachs Global Investment Research

To address that question, we refresh our infrastructure to assess the fair value of EM rates. Previously, our fair value models for EM IRS relied on a Nelson-Siegel (NS) approach, which decomposed EM local rates curves into factors (level, slope and curvature), which were then fitted separately using macro variables. While the NS approach has many advantages, including curve smoothing, the various stages involved in the fitting exercise makes interpretability, in terms of underlying macro drivers, cumbersome across tenors in rates curves. Therefore, in this Global Markets Analyst, we leverage a similar set of macroeconomic and financial variables to develop a panel model, and assess and pin down drivers of fair value across the curves of 18 EM local rates markets.

The results from this exercise allow us to relate more directly our view of EM swap rates to underlying macro fundamentals. In short, we find that:

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