Emerging debt outruns Treasuries as rich-world fiscal fears grow

Published Sun, Oct 25, 2026 · 09:36 PM

INVESTORS from JP Morgan Asset Management (JPMAM) to Generali and Ninety One are loading up on emerging-market debt, defying a surge in Treasury yields that would once have sent them running for the exits. 

Emerging bond funds have drawn 12 straight weeks of inflows, according to the latest Bank of America data based on EPFR Global, while investors surveyed by the lender this month named emerging stocks as one of their top trades even as most US yields have topped 5 per cent.

Historically, emerging-market assets buckled when faced with US monetary tightening, rising Treasury yields and the threat of another European debt crisis.

This time though, investors are increasingly using weakness triggered by those factors as opportunities to add exposure. In fact, returns from emerging-market bonds are nearly four times those from Treasuries since the start of 2025.

This is because the current bout of global fixed-income anxiety is focused more on rich nations’ debt burdens and budget deficits, which helps drive up US, euro region and Japanese borrowing costs. In contrast, developing countries’ fiscal profiles generally look healthier.

“I just don’t think people own enough emerging markets,” Iain Stealey, chief investment officer for fixed income at JPMAM, told an investor conference in London.

He described the sector as among the “most constructive allocations” across the US$4.3 trillion firm’s portfolios, adding that the firm will “continue to see assets deployed there”.

While emerging stock and bond indices have outperformed developed-market peers this year, Stealey expects more gains as “people are looking to find ways of getting, maybe, out of developed-market governments”.

This ongoing switch helps explain why the extra yield investors demand to hold emerging bonds instead of Treasuries has barely budged this year even as investors dumped US bonds. 

Taken by itself

Another big shift is that investors are increasingly judging emerging-market debt on its own merit, not mainly as a relative additional yield over Treasuries.  

“The one thing we’ve done well over the last 18 months is not use Treasuries as our valuation metric,” said Peter Kent, co-chief investment officer of fixed income at Ninety One Asset Management, which recently added emerging debt exposure.

“If you had, you would have stopped buying (emerging-market debt) eight months ago, when spreads got quite tight.”

While the developed world grapples with elevated debt levels, many poorer nations have strengthened their economic and policy frameworks, leaving them better equipped to withstand interest-rate shocks, said Guillaume Tresca, global emerging-market strategist at Generali Asset Management. 

“The global credit rating of emerging-market countries is on the upward trend clearly,” he said. “While on the other side, there have been many questions on developed-market countries, like France.”

Budget deficits are smaller on average in emerging markets than in developed economies, according to strategists at UBS. Most governments have also reduced their vulnerability to the US dollar by shifting more borrowing into their own currencies. 

Many emerging-market central banks also moved earlier and more aggressively to tame price growth, leaving inflation-adjusted yields relatively high, said Milana Muratova of Aberdeen Investments. That has helped bonds and currencies withstand the greenback’s rise.  

That does not make emerging currencies immune to dollar strength, “but it does underline an important point: domestic fundamentals increasingly matter”, Muratova said. 

Changing dynamic 

Despite the rally, pockets of stress remain across the developing world. India has deployed a series of extraordinary steps to support its currency, while dollar borrowing costs have surged towards the 10 per cent mark for several countries, including Mozambique, Sri Lanka and Ecuador. 

For VanEck’s head of active emerging markets debt Eric Fine, India, Philippines and Thailand are markets where local debt yields are just not high enough.

He favours instead the riskier, but higher-yielding dollar bonds of countries such as Venezuela, Ecuador, Bolivia, Nigeria and Ghana.

Desmond Lawrence, senior investment strategist at State Street Global Advisors, said that merging-market debt has performed so well in 2026 also because developing nations have had a lower capacity for taking on debt than advanced economies, which had helped curtailed their debt binges.

“The whole dynamic is changing,” he said, adding that emerging-market debt “will be an asset that’ll get you through the next few quarters”.

“Its resilience has been remarkable.” BLOOMBERG