By Rachel Savage

LONDON, (Reuters) – Emerging market sovereign bonds are at the mercy of Federal Reserve interest rate decisions. JPMorgan analysts (NYSE:), said Monday that this was because the U.S. central banks’ rate increases drain capital from developing countries.

JPMorgan took Nigeria off its list of emerging-market sovereign recommendations that investors should be considered ‘overweight’ for, as the country did not take advantage of high oil price. However, it added Uzbekistan, Serbia, and Uzbekistan.

The Fed increased its overnight benchmark interest rate by half of a point last week to try and control high inflation, while its rates increase also serve as a buffet for higher-yielding emerging market economies.

Analysts at JPMorgan said that the Emerging Markets Bond Index Global Diversified has dropped 16% in this year’s fiscal year. They also noted that the loss was mainly due to rates and $4 billion of net outflows from emerging market markets since April.

The analysts stated, “The external backdrop and the fundamental background have become more difficult for EM sovereigns.” Further downside risks are presented by China’s COVID lockdown.

The riskier sovereign yields are now at 10.6%. This is the highest level seen since April 2020’s coronavirus pandemic. It reduces market access and increases the likelihood of defaults.

The analysts however stated that the “front-loaded pain,” which was experienced by emerging market bonds in September 2021 and had been underperforming since then, was a positive.

Exporters benefited from Russia’s February invasion of Ukraine, which caused commodities prices to rise. JPMorgan stated that the overperformance of oil exporters’ bonds now “looks like it has played out”.

Analysts stated that Nigeria’s National Oil Company did not transfer revenue from January to March due to low oil production and petrol subsidies. It also moved Nigeria’s debt to the bank’s “overweight” category.

According to them, “Nigeria’s fiscal woes have raised market concern despite the positive oil environment.”

The note stated that Serbia was now deemed ‘overweight’ because risks were priced in, and there was high reserves and a prudent fiscal government. However, Uzbekistan’s relatively low debt, despite Russian exposure, led to them placing it in the same group.