As we head into 2026, emerging market (EM) bonds offer a solid opportunity, backed by improved fundamentals, positive technicals, and attractive all-in yields thanks to high baseline Treasury levels.
Credit profiles for EM governments are on an upward trajectory, with positive rating changes far exceeding negative ones in 2025 at a ratio of roughly 2:1, a pattern fuelled by steady improvements in fiscal health while many advanced economies grapple with rising borrowing costs. Developing nations are projected to account for a major slice of worldwide GDP growth, with forecasts showing the growth gap widening compared with their developed counterparts.
The investor base of these markets has evolved, with greater involvement by domestic players reducing reliance on overseas capital and bolstering resilience across market cycles. Corporate net leverage remains low, with the average EM company running at around 1.2x leverage, lower than developed counterparts and representing a 0.6x improvement from levels a decade ago, while also offering superior spread compensation per turn of leverage. Issuer standards have also advanced, with a large proportion of local markets and over half of dollar-denominated issues now qualifying as investment grade.
Spreads have compressed significantly over recent years, testifying to the asset class’s fundamental improvements. However, marginal narrowing is still possible, supported not only by ongoing upgrades but also by inflows. On this point, capital movements swung firmly into positive territory in 2025, though the asset class remains largely under-allocated, leaving room for inflows to continue.
Local-currency EM bonds are particularly attractive. First, EM central banks have been slow to cut rates, leading to elevated real yields that are among the most compelling in years. Second, according to our forex outlook, we expect the dollar to weaken modestly, which not only eases the pressure on dollar-debt issuers, but also boosts local-currency returns. Third, the carry-to-volatility ratio for EM local rates is especially strong and has improved markedly. Within local currencies, frontier markets screen particularly well, albeit while remaining a niche sub-class.
In summary, EM debt’s blend of high carry, improving credit quality, and diversification benefits make a strong case for a fixed income theme in 2026. Risks such as geopolitical flare-ups and a stronger dollar exist, but with resilient fundamentals and under-allocation, the asset class should continue to outperform.
Read our Investment Outlook 2026 for more insights.
The financial instruments and investment strategies portrayed in this document are for informative purposes only. They may differ from those effectively held in an investor’ portfolio. Depending on the jurisdiction and investment profile, one or some of these instruments and strategies – including, where applicable, options – may not be permitted, available or suitable. The opinions expressed herein are correct as at 19 January 2026 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
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