#dollar-strength

#dollar-strength

February's ISM Manufacturing PMI surprised to the upside at 52.4, marking a second consecutive month in expansion territory. At the same time, the prices subindex reached its highest level since mid-2022, highlighting mounting cost pressures. Sticky inflation risks reduce the scope for near-term rate cuts and reinforce support for longer-dated Treasury yields.

The biggest driver for PCY over the next 12 months is U.S. interest rate trajectory. When the Fed cuts rates, two things benefit emerging market sovereign debt. First, U.S. Treasury yields fall, making PCY's 6.1% yield more attractive to income-focused investors. Second, rate cuts typically weaken the dollar, reducing the debt servicing burden for emerging market governments that borrow in dollars.