Backed by solid fundamentals, competitive yields and increased economic resilience in issuing countries, emerging market debt now appears to be an attractive investment opportunity.
Emerging markets, which account for nearly 80% of global GDP growth, are now posting robust economic indicators. Their debt-to-GDP ratio (60%) is well below that of the United States (123%), and their current account balance is close to equilibrium, in contrast to the US deficit. This performance has led to an improvement in their sovereign credit ratings, which have now reached investment-grade (IG) levels.
In addition, these countries’ central banks have demonstrated their ability to pre-empt economic cycles, for example by having raised their interest rates as early as 2021 to contain inflation. This proactive approach has stabilised local currencies, whose volatility is now comparable to, or even lower than, that of G10 currencies.
Limited defaults
Over the past twenty years, emerging market sovereign and corporate bonds have generated annualised returns of 6.2%, significantly outperforming US corporate bonds (+4.2%) and Treasuries (2.7%). Moreover, the volatility of emerging market debt has been similar to that seen in developed markets, but with higher risk-adjusted returns. Currently, emerging market high-yield (HY) sovereign and corporate debt offers an average yield of 7.6%, compared with 6.9% for their US counterparts. On the IG side, emerging markets offer yields of around 5.5%, compared with 4–5% for US IG bonds and Treasuries.
Furthermore, and in contrast to popular belief, emerging market debt is not riskier than that of developed markets
Furthermore, and in contrast to popular belief, emerging market debt is not riskier than that of developed markets: since 2002, defaults on emerging market HY sovereign bonds have averaged 2.5% per year, compared with 4.3% for US HY bonds. In addition, recovery rates after defaults have been higher in emerging countries, demonstrating better restructuring management.
If the US dollar and interest rates continue to fall, financing conditions for emerging market issuers could improve further in 2026. The debt of these countries could thus continue to attract investors, drawn by attractive yields and solid fundamentals. This is particularly true for local currency bonds from frontier economies, which are expected to offer particularly favourable carry/volatility ratios.
In 2026, investors seeking diversification and returns should therefore reconsider emerging market debt for its potential to deliver greater risk-adjusted returns than developed markets.
