October 2025 EMD Review and Outlook: resilient returns amid tariff and Fed rate cut uncertainty

Market review

Emerging market (EM) debt delivered positive returns across the board in October. The asset class benefited from a broadly positive risk environment, as equities continued to rally and credit spreads tightened. Higher-risk frontier sovereigns (3.7%) [1] outperformed hard currency sovereign bonds (2.1%) [2], while corporate bonds (0.6%) [3] underperformed significantly. Local currency bonds (0.5%) [4] also lagged as the US dollar broadly strengthened against EM currencies, generating a negative foreign-exchange return.

Tariffs returned to the top of the agenda. US-China trade tensions escalated after China announced that it would expand the country’s export control regime on rare earth minerals, and US President Donald Trump threatened an additional 100% tariff on Chinese products. Tensions subsequently eased as President Trump and Chinese President Xi Jinping agreed to extend the 10% reciprocal tariff truce for one year during their meeting in South Korea. The US also agreed to reduce fentanyl-related tariffs from 20% to 10%, while China agreed to pause export controls on rare earth minerals and committed to purchasing US soybeans. Meanwhile, the US Federal Reserve (Fed) lowered interest rates by 25 basis points (bps) to 3.75%-4.00%, in line with market expectations. However, expectations for a further cut in December dampened with Fed Chair Jerome Powell commenting that a cut was not a “foregone conclusion”. Against this backdrop, the 10-year US Treasury yield declined by 7bps to 4.08%, its lowest monthly close in over a year, supporting returns for hard currency bonds.

Selected country news

The International Monetary Fund (IMF) and World Bank held their annual meetings in Washington, D.C. The IMF highlighted resilient global growth, supported by stronger policy fundamentals, less severe-than-expected tariffs and favourable financial conditions. However, policy volatility is expected to remain high. Global projections were modestly revised upward from April 2025 levels, largely due to a smaller US tariff shock than previously expected.

It was a busy month of elections in EM countries. In Georgia, the ruling pro-Russian Georgian Dream party claimed victory in local elections, which sparked protests in the country. In Africa, 92-year-old President Paul Biya secured an eighth term in Cameroon. The announcement of Biya’s re-election, which came two weeks after the vote was held, triggered protests and clashes in opposition strongholds. In Latin America, Bolivia’s centrist Senator Rodrigo Paz defeated conservative former President Jorge Quiroga in the presidential runoff, ending nearly two decades of dominance by the leftist MAS party. In Mongolia, Prime Minister Gombojav Zandanshatar resigned after losing a parliamentary confidence vote, raising concerns over political instability as he became the second prime minister to be ousted this year.

In other geopolitical developments, Ukrainian President Volodymyr Zelensky and US President Trump confirmed plans to meet in Washington, D.C. this month, with expectations of increased US support for Ukraine. Trump also announced a potential meeting with President Putin to discuss ending the war, fuelling hopes of a ceasefire. However, Trump later cancelled the meeting and instead imposed new sanctions on Russian oil giants Lukoil and Rosneft, which together account for around 50% of Russia’s oil supply, citing Moscow’s lack of commitment to peace. In addition, the EU unveiled its latest sanctions package, including a ban on Russian liquefied natural gas imports starting January 2027.

Rating changes were mostly positive once again this month. In Africa, S&P upgraded Egypt to B, reflecting strong growth, tourism and remittance flows following exchange-rate liberalisation. Moody’s raised Ghana's rating to Caa1 on improved prospects of debt reduction, stronger external dynamics and greater macroeconomic stability. This was Ghana’s second upgrade following the country’s default in December 2022. Meanwhile, Moody’s cut Senegal's rating to Caa1 with a negative outlook, marking the third downgrade in 12 months, due to high debt levels, rising liquidity stress, delays in completing an IMF programme and greater reliance on regional markets for funding.

Turning to Latin America, Fitch upgraded Guatemala to BB+, citing solid growth, policy prudence and current account surpluses. S&P upgraded Costa Rica to BB, just weeks after Moody's also upgraded the rating to Ba2. Elsewhere, S&P upgraded Barbados to B+, given the country’s strengthened economic policy governance and creditworthiness. Lastly, S&P upgraded Mongolia to BB- and Moody’s upgraded the country to B1 on expectations of robust economic expansion and low fiscal deficits backed by mining activity and strong public investments.

Outlook

We continue to see value in the high-yield and frontier markets. While spreads remain tight, they are supported by structural reforms and multilateral support, and certain credits on the fringes of rating buckets look attractive where we think risks are overpriced. In addition, the slowdown of the US economy should support a US Treasury rally, so we have reduced our underweight in investment-grade EM bonds.

In EM local bond markets, while many mainstream EM rate-cutting cycles are mature, central banks are likely to continue easing as growth slows, inflation remains near target and policy rates remain high relative to historical averages. We are still overweight in Latin America due to attractive real rates in the region and expect more rate cuts to come from frontier market central banks. Moreover, we have increased our overweight in EM currencies, with a particular focus on Central European and frontier market currencies.

For EM corporates, credit fundamentals remain supportive, and the direct impact of US tariffs within the investible universe should be limited. Net supply should fall as EM corporates continue to pay down their bonded debt. As global economic growth slows, we are likely to see downward adjustments to operational performance; however, leverage levels remain low and interest coverage is healthy.

The biggest risks to the EM asset class include the imposition of new tariffs, which could threaten EM exports and lead to policies which leave EM countries disadvantaged. There is also heightened uncertainty if the US Supreme Court strikes down tariffs under the International Emergency Economic Powers Act. A US recession and a further downturn in the Chinese economy could weigh on commodity prices, particularly oil. However, a further steepening of the US Treasury curve may raise financing costs for frontier issuers and limit access to the primary market. Geopolitical risks also remain heightened, with no end in sight for the Ukraine war and tensions in the Middle East having dampened but not disappeared.