EM HY Outperforming US HY Thanks To Oil: EM Sovereign and US Credit Strategy | Europe

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EM HY Outperforming US HY Thanks To Oil: EM Sovereign and US Credit Strategy | Europe

Idea

June 29, 2026 11:18 AM GMT

Morgan Stanley & Co. International plc+MEM Sovereign and US Credit Strategy | Europe Neville Z Mandimika

Strategist

EM HY Outperforming US HY Neville.Mandimika@morganstanley.comMorgan Stanley & Co. LLC +44 20 7425-2509

Christina C Sigler

StrategistThanks To Oil Christina.Sigler@morganstanley.com +1 212 761-4116

Simon Waever

EM HY valuations now look stretched versus US HY, limiting Strategist

Simon.Waever@morganstanley.com +1 212 296-8101

broad upside. We favour idiosyncratic reform stories such as Emma C Cerda

Argentina and Ivory Coast, while US HY remains supported by Strategist

Emma.Cerda@morganstanley.com +1 212 761-2344

solid fundamentals, constructive supply dynamics and a Fed on

hold, capping further EM HY outperformance.

EM sovereign HY outperformance versus US HY now looks stretched: We often

frame EM HY valuations against US HY given the correlation between the two

markets and the tendency for EM to price off its US equivalent. EM sovereign HY

spreads have moved to new 1y tights, with the differential versus US HY now only

around 14bp ( Exhibit 1 ). The driver has been a combination of tighter outright US

HY spreads, even stronger tightening in EM HY spreads, and resulting EM HY

outperformance versus US HY.

The recent move has been driven by lower oil prices, with importers benefiting:

While the move lower in spreads has been oil-driven, it is notable that oil is still US

$13/bbl above its 1y low of US$59/bbl, suggesting there is still scope for prices to

move lower. That said, our baseline assumption is for oil to trade sideways from

here, consistent with our medium-term oil price assumption of US$80/bbl, however