Gramercy Strategy Outlook – 4Q 2026

While the third quarter of 2026 saw its fair share of wild market moves, two things are clear as we enter the final stretch of the year. First, the two overarching macro themes for 2026 that we set out almost a year ago have been very much in play. Second, we now have much clearer visibility into some of the key global economic and market issues for the remainder of the year.

The quarter’s defining feature was, of course, a sharp surge in sovereign yields. While driven primarily by the U.S., the impact was felt across the globe, pushing yields to multi-decade highs in Germany, France, Japan, and beyond. Crucially, this global rate shock exposed underlying domestic vulnerabilities. This was most glaring in France, where sovereign spreads over German bonds surged to almost 150 basis points. It is also complicating currency management in Japan and the formulation of a crucial budget in the UK, the other two vulnerable G7 economies.

For the most part, equities and other risk markets were able to absorb these negative spillovers. However, this defensive capacity came at a cost, steadily eroding underlying market resilience. This resilience was further sapped by stubbornly high oil prices, with supply disruptions notably migrating down the chain from crude to refined products.

The broader stock indices were largely supported by solid corporate earnings, driven in large part by the technology sector. Yet this headline stability masked significant internal divergence. The tech-heavy NASDAQ and the S&P 500 notably outperformed the Russell index by about ten percentage points. We saw a similar story of stark dispersion in global bond markets. By the end of September, U.S.- German yield spreads had widened to 170 basis points. Consequently, the U.S. 10-year Treasury’s total return loss for the month (3.7%) was twice that of its German counterpart.

Meanwhile, the macroeconomic picture remained mixed, with yet another widening gap between weak and weakening survey-based sentiment indicators and solid hard economic data. The latter included an encouraging recovery in German activity, the powerhouse of Europe.

As we pivot to the fourth quarter, investors and policymakers face three important questions:

1. The resilience of resilience: Does the global economy retain the ability to continue absorbing these persistent energy and interest-rate shocks, particularly given the ongoing drawdown in energy inventories?

2. The extent of market dispersion: How much further can this divergence go, both within the stock market and across sovereign bond markets?

3. The threat of contagion: To what extent will persistent interest rate risk spill over more significantly into credit risk?

Global Growth: A Deepening Stress Test

The global economy enters the fourth quarter in better shape than its backdrop would suggest. Brent is above $100 per barrel and both the Federal Reserve and the European Central Bank are hiking rates, while a global sovereign bond sell-off has pushed the U.S. 10-year Treasury yield to 5.3%. Yet activity has held up, and the IMF has raised its 2026 global growth forecast by a tenth of a point, to 3.1% (down from 3.5% in 2025). The question is how long global growth can endure current conditions and where might the first cracks appear.

The supports are real but narrow. In the U.S., AI-driven investment and the equity gains it has fueled are doing much of the work. The S&P 500 is up 14% this year, and that wealth is keeping consumers spending even as hiring cools. Layoffs remain rare, with jobless claims near their lowest levels since 1969, but payroll growth slowed to just 29,000 in September. In Europe, a service-led rebound has lifted the composite PMI to a three-year high, despite the energy shock. In Asia, China’s two-speed economy continues to be led by the AI-tech cycle. Beyond China, the World Bank’s October updates show EM growth holding up. Forecasts were raised for India (7.1% in FY27) and AI-hardware exporters such as Vietnam (7.4%) and Malaysia (5.1%), while Latin America is holding broadly steady at 2.2%, a touch above the World Bank’s prior forecast. The IMF’s October WEO is slightly less upbeat on the aggregate, trimming 2026 EMDE growth by a tenth to 3.7% (4.4% in 2027), but the downgrade is concentrated in the Middle East and Central Asia, now projected to contract 0.3%, a full point below the July forecast. Elsewhere the picture is steadier: emerging Asia at 5.1%, sub-Saharan Africa revised up to 4.5%, and Latin America at 2.3%. In the major advanced economies, growth has relied on momentum, savings, asset prices, and sector-specific demand, with little help from broad-based income growth, and monetary policy is now working against it.

We are watching for cracks in several places, starting with U.S. households, which are spending ahead of their incomes: real spending rose 0.6% in August while income grew 0.2%, and the savings rate has fallen to a near four-year low. That gap appears to be funded by equity wealth, which ties spending to a market concentrated in a handful of AI-linked stocks. With policy still tightening, the gap could be hard to sustain, and a market correction could close it quickly. The latest ISM survey, with slowing activity and rising prices, points in an uncomfortable direction. Europe’s recovery has yet to feel the full effect of ECB tightening, with inflation tracking toward 4% and another hike likely before year end. China is unlikely to provide an offset, since its stimulus is calibrated to defend the growth floor and stops short of reviving domestic demand.

So far, higher rates have been a duration story. Treasuries lost close to 4% in the third quarter, 30-year gilt yields reached 6% for the first time since 1998, Japan’s 30-year yield hit a record, and the France–Germany spread reached its widest since the euro debt crisis. The more important shift is in the nature of the risk. The longer rates stay here, the more this becomes a credit story. Higher-for-longer raises the cost of rolling over debt and feeds directly into interest bills and fiscal deficits, while eroding the rate differential that supports carry and capital flows into EM. For countries and companies with large gross financing needs, thin reserves, or ratings already near a threshold, the transmission from rates to fiscal metrics to ratings can be fast. Fundamentals, however, offer a counterweight. Credit gains this cycle underscore the resilience of the asset class, particularly among more fragile EM credits that have come through recent restructurings and adjustment under IMF programs. Debt relief, fiscal consolidation, and rebuilt reserves have left many of these sovereigns better placed to absorb higher-for-longer than their ratings history would suggest, particularly where restructurings have lowered near-term financing needs, although those still heavily reliant on imported energy remain exposed to the oil shock discussed below.

Oil above $100 cuts across all of this, transferring income from importers to exporters. For importers it compounds the rate shock by widening external deficits and adding to inflation just as financing becomes more expensive. Refined products add a second layer of pressure: with product margins running well ahead of crude, fuel import bills and subsidy costs are rising even for crude exporters with limited domestic refining capacity, eroding part of the fiscal windfall from higher oil prices. Any escalation that pushes Brent or diesel prices materially higher could turn a slowdown into something worse, while an improvement in energy logistics and prices could offer some relief.

Our base case is that global growth holds in the fourth quarter. The growing risk is migration of interest rate risk into credit risk, showing up first in the weakest balance sheets. The signals we are watching are the durability of AI investment and the equity gains tied to it, U.S. consumption relative to income, the pace of financial tightening in the U.S. and Europe, USD strength, energy prices, and primary market access for lower-rated corporates and sovereigns. We increasingly favor sovereigns with external surpluses, credible policy frameworks, and manageable financing needs over corporates on credit grounds, while keeping duration exposure in check given the risk that pressure on long-end yields persists. We remain cautious on energy importers with thin buffers, heavy near-term rollover requirements, or elevated political risk.

A Tightening Turn in Developed Markets Monetary Policy

Last quarter we argued that, if de-escalation in the Middle East held, the policy debate could rotate from “how much tightening” to “when easing resumes,” with a synchronized hold at restrictive levels as our base case. That premise broke down early in the quarter. The U.S.– Iran truce began to unravel in July, and the 60-day ceasefire formally lapsed in August without renewal, while Brent climbed from the $70s in early July to roughly $110 per barrel in September. Energy costs passed through to headline inflation, and in September the European Central Bank (ECB), the Federal Reserve and the Bank of Japan (BoJ) all raised rates, moving the global monetary policy regime from a tightening watch to outright, if cautious, tightening.

The ECB paused in July, then delivered a unanimous 25 basis point hike in September that lifted the deposit facility rate to 2.50%, warning that inflation is set to remain well above target for an extended period. With core inflation edging up to 2.5% and the manufacturing PMI at its highest since May 2022, markets price roughly three further hikes by mid-2027, and we expect the next move before year-end. The Bank of England (BoE) was the only major holdout, keeping its policy rate at 3.75% throughout the quarter. Its September vote split 6–3 in favor of holding, but with UK inflation up to 3.1% and the MPC expecting it to climb further, a November hike looks more likely than not.

For the Federal Reserve, the quarter completed the shift from a hawkish hold to tightening under Chair Kevin Warsh. After holding at 3.50%–3.75% in July over three dissents, and a Jackson Hole debut in which the Chair named price stability the Fed’s predominant focus without signaling a rate path, the FOMC raised rates by 25 basis points to 3.75%–4.00% in September in a unanimous 12–0 vote, its first hike since July 2023. Most participants projected at least one further increase this year, but the minutes released on October 7 showed officials did not see the move as the start of a rapid series of hikes, and the data since have complicated the case for follow-through: September payrolls rose just 29,000, August was revised down to 133,000, unemployment ticked up to 4.2% and August core PCE eased to 3.0%. Markets have largely priced out an October move, but with inflation still well above target and the September projections pointing to one more increase, December remains the live meeting, with around 80% implied market probability of a rate hike at the time of writing. The key question for the fourth quarter is whether September proves a single insurance hike or the opening of a tightening cycle, with material implications for EM fixed income assets in both directions.

The repricing of term premium was also consequential for global markets, as it increasingly decoupled the long end from the policy path. The U.S. 10-year Treasury yield rose above 5% in September for the first time since 2007 and touched 5.30% at the start of October, and the 30-year crossed 5.60% for the first time since 2002, even as softer data pulled front-end expectations lower; 10-year Japanese government bond yields reached their highest since 1996 and the France–Germany spread widened. We attribute the move mainly to fiscal pressure and heavy sovereign supply, AI-related corporate issuance and uncertainty over energy-driven inflation, with long-run inflation expectations broadly anchored.

Official intervention has shown its limits: long-end yields kept rising after the U.S. Treasury doubled its long-dated buyback operations, and Japan’s late-July yen intervention, reportedly backed by U.S. rate checks, bought only temporary relief, with USD/JPY back near 158 at quarter-end. The November Treasury refunding will be an important test of demand.

For the fourth quarter, our base case is that the systemic central banks stay in tightening mode with limited appetite to extend it: one further 25 basis point hike from both the Fed and the ECB by year-end, a likely BoE hike in November, and a BoJ whose pace depends on the yen as much as on domestic inflation. The financial-stability concerns we flagged last quarter as a constraint on easing now limit how far policymakers can tighten, as a disorderly long end or weak auctions, a sharper break in the U.S. labor market that would leave the Fed hiking into weakness, or a correction in an equity market reliant on a narrow group of AI-linked leaders would each raise the cost of further hikes. Energy remains the swing factor as pressure shifts from crude toward refined products such as diesel, and renewed escalation in the Gulf around the U.S. midterms is the main upside risk to inflation and, by extension, to the policy path.

Emerging market central banks diverged further as DM tightening and a firmer dollar replaced the patient Fed we had anticipated. High-real-rate economies were able to keep easing: Brazil cut the Selic for a fifth consecutive meeting to 13.75% in September, hours after the Fed hiked, and Hungary extended its easing to 5.50% as inflation fell to 1.2% in July. On the flip side, Bank Indonesia held at 5.75% after 100 basis points of hikes to defend the rupiah, the Bank of Korea hiked twice to 3.00% and the South African Reserve Bank surprised with a hold despite inflation at a two-year high.

Entering the fourth quarter, U.S. long-end yields above 5% and a dollar index at an 18-month high have narrowed the carry cushion that supported EM local markets for much of the year, and in late September currency weakness accounted for the bulk of local-market losses. We expect policy to stay highly differentiated: high-real-rate economies such as Brazil retain room to ease cautiously, CEE central banks will be increasingly anchored by the ECB, and those defending weak currencies or facing refined-product pass-through are more likely to hold or lean hawkish. As in previous quarters, initial conditions such as credit metrics, fiscal credibility and policy flexibility will separate winners from losers among sovereign assets, now in a regime of DM tightening with an uncertain end point.

Geoeconomics: Managed Instability

For EM, geoeconomics still sets the tone through two channels, energy and trade. On energy, the Iran conflict remains the dominant driver and the main reason Brent is above $100, through the risk premium it sustains and the strain it has placed on refined product supply. The June memorandum of understanding began to unravel in July, and its 60-day ceasefire formally lapsed on August 17; the U.S. has since reimposed its naval blockade, and a Houthi–Saudi front has opened. Transits through the Strait of Hormuz itself remain well below pre-war levels, although Gulf crude exports had largely recovered by late September through bypass routes and shuttle tankers. Diplomacy is active but stalled after Washington rejected Iran’s late-September offer to reopen the strait in exchange for sanctions relief.

We see a durable settlement in the fourth quarter as unlikely. Reports have diverged on whether President Trump intends to resume strikes before or after the November 3 midterms, concentrating escalation risk around the U.S. political calendar, and tanker attacks in the Strait accelerated in early October. With crude exports largely restored, the pressure point has shifted to refined products, where China’s suspension of fuel exports, Russia’s diesel export ban and the threat of U.S. export restrictions have tightened supply. EM energy exporters with secure export routes stand to benefit, while fuel importers face renewed passthrough.

Conflict and policy have both shaped the diesel squeeze. Gulf product flows lag the crude recovery, and Russian refinery outages and Chinese export curbs have tightened supply further. Reserve releases show how far energy security has become a matter for negotiation between governments: the G7’s 100 million barrel release on October 2 came only after U.S. pressure on Europe to tap its stocks, and it accelerates barrels already pledged without adding new supply or refining capacity.

On the Russia–Ukraine war, the U.S. diplomatic bandwidth we expected the Gulf to free up did not materialize. Envoys Steve Witkoff and Jared Kushner met President Putin in Moscow and made their first visit to Kyiv in early September, ending a freeze of nearly eight months, but positions on territory remain mutually exclusive and President Zelensky said he expects the war to continue through the winter. We expect attritional conflict and strikes on energy infrastructure to dominate the fourth quarter, adding to tightness in refined products, with a ceasefire before year-end unlikely.

On trade, U.S.– China relations have settled into strategic stability. President Xi’s September state visit to Washington extended the trade truce to early next year and set out tariff reductions on around $60 billion of two-way trade, but delivered nothing on export controls, rare earths, or Taiwan. We expect rolling extensions of the truce without a comprehensive deal, with incremental progress possible on the sidelines of the APEC Summit in November and the G20 Meeting in December. That lowers near-term escalation risk, but the structural competition over technology and supply chains is unchanged.

USMCA remains in force but has now moved to annual reviews after it was not renewed at the July joint review. Bilateral talks with Mexico have been ongoing throughout the Trump administration, and while the latest round was postponed in September, we do not read that as a signal on the direction of negotiations. We view the relationship constructively: most Mexican exports remain exempt from recent U.S. tariffs, leaving Mexico with one of the best relative tariff positions of any U.S. trading partner, and we see room for bilateral side deals over the remainder of the Trump term.

In the U.S., polling ahead of the November 3 midterms has moved decisively against the governing party, with Democrats leading the generic ballot by roughly nine to ten points, driven in part by energy and cost-of-living pressures. Trade and foreign policy run largely through executive authority, so the direction of tariff and Iran policy is unlikely to shift, although the electoral calendar may shape the timing of any escalation in the Gulf. The more material market implication is fiscal: a divided Congress should constrain further fiscal expansion, easing one of the drivers of the term premium repricing discussed above, and bring heavier oversight of war powers and tariffs.

Venezuela’s normalization progressed during the third quarter. Oil sector engagement gained momentum, including Chevron’s $7 billion commitment to more than double output by 2031, while the debt restructuring groundwork continued but remained in a pre-negotiation phase. The macroeconomic framework and debt sustainability analysis (DSA) have yet to be published, and licenses for restructuring negotiations or execution have not yet been issued, though market expectations are that the process will move forward soon. Still, deeper multilateral consultation, possible clearing of IDB arrears and fresh financing, and IMF plans to open a resident representative office in Caracas in 2027 improve prospects for an Article IV consultation and add credibility.

Latin America’s political cycle has continued to shift rightward. Abelardo de la Espriella took office in Colombia in August, extending a run of conservative and right-leaning victories that includes Chile, Bolivia and Peru, and Brazil, Latin America’s largest economy, appears likely to follow: right-wing Senator Flávio Bolsonaro outperformed the polls in the October 4 first round presidential election, finishing ahead of leftist President Lula with 47.0% against 45.2%, and is now seen by many analysts as the favorite in the October 25 runoff. With the fiscal trajectory the dominant market concern, we expect Brazilian assets to trade the runoff, and the winner’s early fiscal signals, as the fourth quarter’s main regional event risk. Geopolitics remains in the driver’s seat for markets and outcomes are diverging sharply by country, so we continue to favor active differentiation over broad directional exposure.

Investment Strategy and Outlook

Volatility remained the dominant characteristic of markets in the third quarter. For emerging markets fixed income, Treasuries did most of the damage, with the longer-duration parts of the asset class absorbing the bulk of the losses while spreads across much of the market held steady. Late in September, the move in rates briefly reached credit, with high-yield spreads widening in both EM and the U.S. before recovering some of that ground in early October. The episode was short, but we think it deserves attention because it gives an early indication of how credit may behave if rates stay at these levels for an extended period.

Higher rates tend to work on borrowers slowly. Many issuers took advantage of the low-rate years to extend their maturities, and much of the market is still servicing debt priced well below today’s yields. That has bought them time, and near-term refinancing needs are modest. The runway is still there, but it gets shorter with every quarter that rates stay high. As older bonds mature and are refinanced at current levels, interest costs rise, weaker issuers find fewer options, and the probability of more extreme outcomes increases. Some of this is already visible among the lowest-rated credits, which have underperformed in recent weeks and whose spreads have become more sensitive to moves in Treasuries. So far the pressure has been largely contained to that segment, and fundamentals across most of the asset class remain healthy. If rates stay elevated, however, we would expect it to build over time. In our view, that calls for closer attention to refinancing risk, though not, at this stage, for a broad reduction in exposure.

In public credit, carry remains the engine of return in our central case, but it has to be earned issuer by issuer, and at current yields we are comfortable staying invested where it adequately compensates for the risk. We are, however, being more careful about where that carry comes from. Our preference is for high-quality investment grade and for BB and crossover credits. We are limiting exposure to single-B and CCC issuers with refinancing needs over the next two years, and to long-dated, high-priced investment-grade bonds, which would be hit on both rates and spreads in a Fed-driven sell-off. Should the pressure in the weakest credits spread more widely, or should growth weaken materially, we would expect to become more defensive.

Our private credit and special situations strategies play a different role in this environment. Their returns are driven largely by contractual cash flows, collateral and structural protections rather than by day-to-day moves in rates and spreads, and they have provided a source of stability for the broader strategy as public markets become more volatile. Across our strategies, we remain invested as described above while keeping enough agility to take advantage of market dislocations if and when they arise, with a busy political and policy calendar ahead of year-end likely to test markets more than once.

Multi-Asset

Gramercy’s Multi-Asset strategy experienced a modest decline in the third quarter, as a sharp repricing of U.S. interest rates weighed on public-facing exposures. The pressure stemmed from duration rather than credit, and the strategy’s private and catalyst-driven sleeves were collectively positive contributors.

The defining feature of the quarter was the move in rates. Persistent inflation concerns and oil prices kept elevated by renewed Middle East tensions pushed the 10-year Treasury yield to its highest level in almost two decades, and in September the Federal Reserve delivered its first rate increase since 2023. Emerging market credit spreads, by contrast, were resilient, tightening in August and holding steady through September’s selloff. Geopolitics remained a source of dispersion, as hopes for a Ukraine settlement built and faded around the August meeting between Presidents Trump and Putin.

Performing public credit bore the brunt of this backdrop. Investment grade sovereigns were the most exposed, given their longer duration profiles, while a spread-driven rally in August recovered part of the July decline. We view the quarter as a repricing of rates rather than a deterioration in emerging market credit fundamentals. Consistent with our intention to add investment grade duration on dislocation rather than on a schedule, we used the September weakness to add at entry yields we view as attractive, while public credit remains a deliberate underweight.

Private credit was a positive contributor in every month of the quarter. Its share of the strategy has grown over the year, reflecting our top-down view that elevated uncertainty in public markets favors privately negotiated, senior secured opportunities with contractual protections. That positioning helped insulate the strategy from the rate volatility driving public markets.

Opportunistic equity was a meaningful contributor, led by a Turkish ride-share platform whose operating momentum continued to run ahead of expectations. The company raised full-year guidance on faster adoption and expanding margins and turned profitable on an adjusted operating basis for the first time. A Colombian bank also contributed, supported by peso appreciation. Late in the quarter, we initiated a position in an independent oil producer focused on Ghana after its shares declined sharply on an adverse tax arbitration ruling. We believe the market priced in payment of the full assessment. We expect an eventual settlement to be lower, given the company’s favorable outcome in a separate tax dispute and the recent extension of its Ghanaian licenses.

In opportunistic public credit, the Ukraine sovereign bonds initiated last quarter rallied on peace expectations before retracing when no agreement emerged, and we reduced exposure. Our position in a large Brazilian petrochemical producer, noted last quarter, has become an active restructuring situation. We added ahead of the company’s out-of-court process for its unsecured debt, which a Brazilian court cleared in August. The bonds faced temporary pressure in September after bondholders rejected the initial proposal and pressed the controlling shareholders for a capital commitment. We added again late in the quarter, and a November deadline to secure majority creditor support provides a defined catalyst.

Special situations saw limited activity, with downside protection around our Venezuelan positioning detracting in August before recovering in September. After carrying no hedge exposure since June, we re-established small macro hedges in August through equity index and gold options, prompted by Middle East tensions and rising yields. They were a modest detractor, and we continue to view them as tail protection with a small, known cost.

Looking ahead, the strategy carries several catalysts on defined timelines, including the petrochemical producer’s restructuring and the Ghana-focused oil producer’s engagement with the authorities. Higher yields have improved the starting carry on high-quality public credit, and in private credit we remain focused on disciplined deployment into secured lending. In a year defined by volatility, fragmentation, and dispersion, we continue to believe returns are best driven by security selection and sound structure rather than market direction. We believe the strategy is appropriately positioned for the quarters ahead.

Emerging Markets Debt

Emerging markets debt gave back part of its first half gains in the third quarter, with rates the main driver for most of the period. As U.S. long-end yields rose to their highest levels in close to two decades and the dollar strengthened, the longer-duration, higher-quality segments of the asset class were hit hardest. Sovereigns underperformed corporates, which benefited from their shorter duration, and in both, high yield outperformed investment grade. In the last days of September, the selling briefly extended to credit, before spreads partially retraced in early October as Treasuries stabilized and fund flows turned positive. Over the quarter as a whole, EM spreads ended little changed while U.S. high-yield spreads widened meaningfully, and year-to-date losses remain largely attributable to Treasuries. Local-currency bonds performed best, although dollar strength weighed on currencies toward quarter-end. Even so, the late-September move showed that, from tight starting levels, credit has less of a buffer against a further rates shock.

We expect rates to remain the dominant driver through year end. As we noted last quarter, one further Fed hike is manageable and largely reflected in current yields, while a sustained tightening cycle would be considerably more difficult, particularly for lower-rated borrowers. Long-end yields have also moved somewhat independently of the policy outlook this year, which makes the timing of any turn in Treasuries difficult to call. That said, with yields near two-decade highs, the case for owning duration has improved, and at this stage of the cycle we would rather be paid for taking rate risk than for taking credit risk. Where we hold duration, we prefer to do so through high-quality credits trading well below par, where the pull to par offers some protection if rates continue to rise and meaningful upside if they reverse.

The same rise in yields has improved the entry point for credit more broadly. Spreads are still tight, especially in investment grade, so most of the protection now comes from all-in yields, which provide a reasonable cushion if spreads drift wider. Corporate fundamentals help explain why the pressure has so far stayed at the margins. Earnings growth this year is the strongest since the post-pandemic recovery, leverage remains well below developed-market levels, rating actions have skewed toward upgrades, and light maturities over the next twelve months mean most issuers are not yet being forced to refinance at today’s yields. These are, however, measures of where balance sheets stand today. Higher funding costs work through with a lag, and the issuers that feel them first are usually those least able to carry them, which is why we place more weight on refinancing needs than on headline metrics.

In practice, that means watching the lower end of the ratings spectrum. Stress so far has been concentrated in Brazilian restructurings that began last year, while single-B spreads have held. But borrowing costs for lower-rated issuers are approaching levels that make refinancing difficult and primary issuance slowed in September as weaker borrowers waited for calmer markets. We do not see this as a turn in the credit cycle, but these are the areas we would expect to deteriorate first. Europe is a second channel to watch, since a sell off led by European government bonds could push rates and EM spreads in the wrong direction at the same time, with EM Europe the most exposed. Technicals offer some offset, as heavy calls and buybacks pushed corporate net financing into negative territory in the third quarter and sovereign issuance has slowed to a more normal pace after a record first half.

In hard currency, our bias is toward balance sheets that can withstand a longer period of expensive funding, meaning strong liquidity, visible hard-currency revenues and limited dependence on new issuance, with close attention to the governance issues behind this year’s largest credit events in Latin America. Energy prices continue to separate winners from losers at both the company and country level, and in sovereign high yield the gap between the strongest and weakest credits remains wide enough to reward active selection. In investment grade, we are avoiding the tightest, higher-priced names most exposed to heavy supply from U.S. technology companies, and in high yield we prefer BB and crossover credits over single-B and CCC issuers with near-term refinancing needs. Brazil’s election is the region’s main event. Markets have already priced a more market-friendly outcome, and we would want to see policy follow through before adding meaningfully.

Local-currency markets have performed better than in previous periods of rising U.S. rates, helped by investors diversifying away from the dollar, but the carry cushion has narrowed. We remain cautious overall, favoring net energy exporters and markets where real rates give central banks room to respond, and are more selective in Central Europe. More broadly, we expect the fourth quarter to remain volatile. Where a price move reflects a deterioration in an issuer’s ability to pay, we act accordingly. Where it reflects forced selling or a broad move in rates, it is more likely to be an opportunity. We believe that at these yields, patience pays, and we would rather hold good-quality carry through periods of volatility than try to time an exit and re-entry.

Capital Solutions

Emerging markets enter the fourth quarter against a mixed macroeconomic picture. Higher sovereign yields, led by U.S. Treasuries, have contributed to renewed volatility across global financial markets. Renewed tensions in the Middle East have kept energy prices elevated, adding to inflation pressures and limiting the scope for monetary easing. Economic activity has remained resilient despite these pressures, supported in part by continued investment in artificial intelligence and infrastructure, alongside stable growth across several of our core markets.

Against this global backdrop, the strategy continues to perform in line with expectations, supported by strong structures and cash flow protections. Higher funding costs and less predictable access to public markets are expanding the opportunity set for tailored financing, while market volatility and dispersion continue to support selective deployment, with discipline on structure, pricing, and risk-adjusted returns. Latin America remains a core focus, with opportunities increasingly driven by country-specific fundamentals. Political development cycles over the past 12 months point to a more favorable cycle across Chile, Peru, Brazil, and Colombia, which together represent approximately 57% of the strategy.

Emerging market high-yield corporate primary issuance, excluding financials, reached approximately $9.2 billion during the third quarter, down 48% from $17.7 billion in 3Q25, according to BondRadar. As of early October, year-to-date Latin American primary issuance stood at approximately $117 billion, down 28% YoY, while the high-yield share increased to approximately 40% from 26%.

Mexico continues to benefit from trade integration, supporting its position as a key manufacturing and logistics center within North American supply chains. Inflation has continued to moderate, with core inflation at approximately 3.75%, while the central bank has maintained its policy rate at 6.50%. Trade discussions with the U.S. continue following the July USMCA review, with the agreement remaining in force. The scale and diversity of the economy continue to support a broad opportunity set across sectors with distinct financing needs. The strategy remains focused on industrial real estate, SME lending, and infrastructure linked to supply chains and energy resilience.

Brazil maintains a broadly stable macro backdrop, with close attention to political developments and recent corporate headlines. In the October 4 presidential election first round, Flávio Bolsonaro received 47% of votes, compared with President Lula’s 45%, ahead of the October 25 runoff. Congressional elections held on the same day increased the representation of right and center-right parties. We see Bolsonaro as a favorite in the runoff. A right-wing president backed by a conservative-leaning Congress is the best-case scenario for Brazil’s fiscal and reform outlook from a market perspective, in our opinion. On the monetary front, the Selic was reduced to 13.75% in September, while inflation increased to approximately 4.6%, reinforcing a cautious outlook for further monetary easing. High local funding costs continue to pressure cash generation and refinancing capacity, contributing to a general credit quality deterioration with debt restructurings and a broader contraction in local corporate credit markets taking place, while supporting demand for USD financing among companies with hard-currency revenues. We remain focused on low-volatility sectors, agribusiness commodity exposure, and asset-backed structures.

Türkiye continues to offer selective opportunities, supported by improved market confidence under a monetary policy framework focused on disinflation and macro stability. The decline in sovereign risk premiums and recovery in gross reserves reflect progress since the policy shift. Inflation remains elevated at approximately 32%, while the policy rate stands at 37%. Local borrowing costs of 45–50% and constrained bank lending sustain demand for tailored USD financing. Opportunities remain concentrated in export-oriented companies with strong margins, effective cost pass-through, and supportive capital structures. Potential early elections and currency developments remain important monitoring considerations.

Across the rest of Latin America, opportunities continue to be driven by country-specific fundamentals and the policy priorities of new administrations. In Peru, the retention of Julio Velarde as central bank governor supports monetary continuity, alongside expected growth of approximately 3%, providing a constructive backdrop for export-linked and asset-backed opportunities. In Colombia, fiscal consolidation remains a key priority, with the new administration’s discussions with the IMF focused on addressing financing needs and strengthening the fiscal framework. The strategy remains focused on structures with strong cash flow visibility and currency protection. In Costa Rica, opportunities remain centered on real estate projects driven by external demand and secured by high-quality collateral.

Overall, approximately $340 million was deployed during the third quarter through a combination of new investments, loan upsizes, and platform financings. Deployments spanned the automotive, food processing, real estate, and financial services sectors across Peru, Türkiye, and Colombia. At quarter-end, the pipeline included approximately $500 million under execution, $275 million in advanced due diligence, and over $1.7 billion in early-stage opportunities.

The pipeline spans a diverse set of sectors and geographies. Key opportunities include real estate in Mexico, Costa Rica, and Chile; financial services in Colombia, Mexico, and across emerging markets; industrials in Türkiye; agribusiness and metals and mining in Brazil; and telecommunications in Mexico.

Special Situations

The Special Situations team continues to focus on managing and monetizing our existing holdings across emerging markets, including Brazil, Mexico, Peru, Argentina, Venezuela, and Puerto Rico, as well as developed markets such as the United States and the United Kingdom.

We continue to progress with our AI digital infrastructure initiatives, building on the partnership we have to co-locate data centers next to power plants owned by one of the country’s largest power producers. Towards that end we have recruited an experienced executive team to lead the effort, along with a technical team with significant data center construction experience for industry leading companies. Although debt markets are at times challenging, we see continued strong demand for GPU hosting capacity. The Company is currently engaged in commercial discussions with customers for our initial site, with a ready for service date of late 2027, and additional sites in our pipeline for 2028 and beyond.

Conclusion

Emerging markets have now been through both an energy shock and a rates shock this year. They have fared reasonably well, though not without cost, and fundamentals have so far held up. But the balance of risks is shifting. The longer rates stay high, the more those costs will pass through to borrowers, and with spreads starting from tight levels, there is less margin for error. At the same time, the list of developments that could unsettle markets has grown, from a more extended tightening cycle and a reversal in AI-related investment to renewed escalation in the Gulf and credit stress spreading beyond the weakest names. We cannot know which, if any, will materialize, but taken together they leave the tails fatter than they have been for some time. In that environment, we are giving greater priority to protecting capital, keeping liquidity available, and being more demanding about the risks we are paid to take. Our private credit exposure provides an anchor of stability through this period, and we remain invested with enough agility to take advantage of dislocations if and when they come.

We have greater confidence in the longer-term case for emerging markets. A growing number of emerging market issuers now combine higher real yields, stronger balance sheets and more credible policy than their ratings history suggests, and in many cases their trajectory compares favorably with that of developed-market borrowers. Realizing that value depends on knowing which borrowers can live with today’s cost of capital, and on being prepared to act when market prices fail to tell them apart. That is what Gramercy’s “Better Approach to Emerging Markets®” is designed to do.