Don't ignore local sentiment when the data looks good - My EM bond lesson

Biggest mistake I made last year was getting too tunnel-visioned on the macro data for a specific EM bond play ($BRL, $MXN bonds specifically) without adequately factoring in the ongoing domestic political noise. The numbers looked great – inflation trending down, growth looking resilient, central bank hawkish. On paper, it was a solid case for long duration. What I failed to appreciate was how deeply ingrained the political uncertainty was, despite what the economic reports suggested.

The market was pricing in a lot more political risk premium than my model was, and it kept the spreads wider and the local currency under pressure for longer than I anticipated. I ended up cutting the position for a minor loss when I should have just waited or sized it smaller from the start. Lesson learned: the 'local feel' can often trump purely quantitative signals in EM, especially when it comes to politics and their impact on sentiment.