Insights
The Investment OutlookEmerging Markets Debt: how Trump's return is shaping opportunities
Emerging markets are adapting to Trump’s return, navigating tariffs and volatility. Will resilient economies and high yields create new opportunities for investors in 2026? Discover what’s driving EM debt now.
Authors
Leo Morawiecki
Investment Specialist, Fixed Income, Aberdeen
Robert Gilhooly
Senior Emerging Markets Economist
Part of
The Investment Outlook
Duration: 4 Mins
Date: 13 Nov 2025
It has been one year since US president Donald Trump staged his dramatic political comeback, winning the US election on 5 November 2024.
Other EMs benefited from a confluence of supportive factors: the rollout of artificial intelligence technologies in the US boosted global demand for components and services; a weaker dollar eased financial pressures, enabling many central banks to cut rates; and Washington’s eventual retreat from its most aggressive tariff threats helped calm investor nerves.
That said, the recent flare-up between the US and China underscores the fragility of this evolving system. If the US Supreme Court strikes down Trump’s use of the International Emergency Economic Powers Act, many of these informal arrangements may lack enforceability.
The justices met in the first week of November to begin deliberations, with a decision likely by year-end.
The Fed will be mindful of delayed inflationary effects from the tariff hikes. But weakness in the labour market data – particularly non-farm payrolls – should be enough to motivate further policy easing.
Damage to potential US growth from tariffs and a tougher migration policy is unwelcome. However, it should at least keep downward pressure on the US dollar.
In EMs, disinflationary pressure from excess capacity in Chinese manufacturing can help moderate prices further. Tighter government budgets will also play a role.
All of which should reduce the barriers for EM central banks to cut policy rates – helping generate a solid backdrop for EM debt markets.
The question now is: what will these competing forces mean for investors in emerging market debt?
Let’s break it down.
As with most credit markets, spreads are tight, shifting the EM debt narrative. Now, it is all about the carry trade. Mainstream EM yields are 8.5%, compared with 8% for US high yield. In the frontier space, yields exceed 10% – a handsome return relative to almost all other areas of the bond market.
The irony? Despite two years of strong performance, the asset class has seen three years of net outflows. But investor attitudes are beginning to shift.
Since early April, hard currency sovereign bonds have recorded 11 consecutive weeks of inflows. Flows had bottomed out at –US$9.8 billion in April but are now up to +US$4 billion year-to-date, according to JP Morgan.
What is behind the shift? EM sovereign fundamentals are improving. The primary market has reopened to many high-yield issuers. Several nations have light maturity schedules and smaller fiscal deficits. In recent weeks, Angola and Kenya issued new bonds while tendering shorter-dated ones, effectively pushing out their maturity profiles.
Before the year is out, Nigeria and Jordan are also expected to come to market, among others. The point? US policymaking is just one factor driving EM debt returns.
That is why we remain constructive on the asset class as we move into 2026.
Fund flows into local currency strategies total over US$7 billion – modest, but a marked improvement on previous years.
As highlighted, the Fed cut towards year-end will ease upward pressure on the dollar and give EM central banks more room to reduce interest rates where appropriate.
We expect continued strong local currency performance in 2026, both from a rates and FX perspective.
On top of this, investor diversification away from the US into EM local currency debt will support the sector. Previously, large US money managers shifted allocations away from emerging EM debt into private credit (essentially, US investment into US capital markets).
This trend is now reversing, albeit slowly, given the time it takes large institutions such as insurers and pension funds to rejig their asset allocations. Nonetheless, it is a trend we believe has legs.
A weak US dollar and EM rate cuts are further supporting the asset class.
For investors, high single-digit yields remain among the most attractive on offer across bond markets. That is why we remain constructive on EMs as we move into 2026.
His return to the White House reignited global trade uncertainty, culminating in the so-called ‘Liberation Day’ tariffs that sent shockwaves through financial markets.
For emerging markets (EMs), the past 12 months have been a rollercoaster – marked by volatility, resilience and adaptation.
The calm after the storm
Despite the initial turbulence, EMs absorbed the tariff shock surprisingly well. China, often the focal point of US trade actions, largely shrugged off the impact. Policymakers redirected exports and maintained growth momentum by ramping up green investment.Other EMs benefited from a confluence of supportive factors: the rollout of artificial intelligence technologies in the US boosted global demand for components and services; a weaker dollar eased financial pressures, enabling many central banks to cut rates; and Washington’s eventual retreat from its most aggressive tariff threats helped calm investor nerves.
Brave new world
In the wake of Trump’s return, the contours of a new global trading system have begun to take shape. ‘Framework’ deals – less formal and far less detailed than traditional trade agreements – have emerged between the US and several major trading partners.That said, the recent flare-up between the US and China underscores the fragility of this evolving system. If the US Supreme Court strikes down Trump’s use of the International Emergency Economic Powers Act, many of these informal arrangements may lack enforceability.
The justices met in the first week of November to begin deliberations, with a decision likely by year-end.
Looking ahead to 2026
US trade policy and the pace and extent of Federal Reserve (Fed) rate cuts will be key determinants of global liquidity and market sentiment towards EMs.The Fed will be mindful of delayed inflationary effects from the tariff hikes. But weakness in the labour market data – particularly non-farm payrolls – should be enough to motivate further policy easing.
Damage to potential US growth from tariffs and a tougher migration policy is unwelcome. However, it should at least keep downward pressure on the US dollar.
In EMs, disinflationary pressure from excess capacity in Chinese manufacturing can help moderate prices further. Tighter government budgets will also play a role.
All of which should reduce the barriers for EM central banks to cut policy rates – helping generate a solid backdrop for EM debt markets.
The question now is: what will these competing forces mean for investors in emerging market debt?
Let’s break it down.
EM hard currency debt – turning tide
Credit spreads have tightened over 2024 and 2025, with the most pronounced moves at the lower end of the credit rating spectrum – CCC-rated names and those in or emerging from default on external debt.As with most credit markets, spreads are tight, shifting the EM debt narrative. Now, it is all about the carry trade. Mainstream EM yields are 8.5%, compared with 8% for US high yield. In the frontier space, yields exceed 10% – a handsome return relative to almost all other areas of the bond market.
The irony? Despite two years of strong performance, the asset class has seen three years of net outflows. But investor attitudes are beginning to shift.
Since early April, hard currency sovereign bonds have recorded 11 consecutive weeks of inflows. Flows had bottomed out at –US$9.8 billion in April but are now up to +US$4 billion year-to-date, according to JP Morgan.
What is behind the shift? EM sovereign fundamentals are improving. The primary market has reopened to many high-yield issuers. Several nations have light maturity schedules and smaller fiscal deficits. In recent weeks, Angola and Kenya issued new bonds while tendering shorter-dated ones, effectively pushing out their maturity profiles.
Before the year is out, Nigeria and Jordan are also expected to come to market, among others. The point? US policymaking is just one factor driving EM debt returns.
That is why we remain constructive on the asset class as we move into 2026.
EM local currency – further to run
Turning to local markets, we remain positive and believe that returns can be supported by a weaker US dollar and lower EM interest rates. The JP Morgan GBI Global Diversified Index has returned over 15% in 2025 (as of 17 October 2025), with foreign exchange (FX) gains contributing over 6%.Fund flows into local currency strategies total over US$7 billion – modest, but a marked improvement on previous years.
As highlighted, the Fed cut towards year-end will ease upward pressure on the dollar and give EM central banks more room to reduce interest rates where appropriate.
We expect continued strong local currency performance in 2026, both from a rates and FX perspective.
On top of this, investor diversification away from the US into EM local currency debt will support the sector. Previously, large US money managers shifted allocations away from emerging EM debt into private credit (essentially, US investment into US capital markets).
This trend is now reversing, albeit slowly, given the time it takes large institutions such as insurers and pension funds to rejig their asset allocations. Nonetheless, it is a trend we believe has legs.
Final thoughts
President Trump’s return has tested EMs – from policy decisions to tariffs. Nonetheless, many nations have not only survived his comeback but thrived. Several are in strong fiscal positions and have recalibrated their trading partnerships following Trump 1.0.A weak US dollar and EM rate cuts are further supporting the asset class.
For investors, high single-digit yields remain among the most attractive on offer across bond markets. That is why we remain constructive on EMs as we move into 2026.
