September 2025 EMD Review and Outlook: positive returns despite geopolitical tensions

Emerging market (EM) debt posted positive returns across the board once again in September, supported by a benign risk environment. Hard currency sovereign bonds (+1.8%) [1] outperformed frontier sovereigns (+1.5%) [2], while corporate bonds (+1.0%) [3] lagged slightly. Meanwhile, local currency bonds (+1.4%) [4] also performed well, aided by a broadly stable US dollar over the month.

Investors faced conflicting economic signals from the US, as weak labour data was followed by stronger inflation and activity readings, complicating the policy outlook. Against this backdrop, the US Federal Reserve (Fed) delivered a 25 basis points (bps) rate cut to 4.00-4.25%, which helped support US Treasuries. The 10-year US Treasury yield declined by 8 bps to 4.15%, generating positive US Treasury returns for hard currency EM bonds and supporting broader risk sentiment. Oil prices were more volatile, with the OPEC+ (Organisation of the Petroleum Exporting Countries and other oil-producing nations) announcing another output increase for October, though smaller than in previous months. However, this supply boost was offset by heightened geopolitical tensions and damage to Russian oil infrastructure from Ukrainian drone strikes, which pushed prices to a seven-week high before ending the month 1.6% lower at $67.02.

Selected country news

Among a raft of EM elections in September, Argentina was a key focus. President Javier Milei suffered a clear defeat in the Province of Buenos Aires local elections, where the opposition Peronist party secured 47.3% of the vote (compared to just 33.7% for the ruling Liberty Advances). This result was worse than any poll had predicted. The resulting political uncertainty weighed on the peso, prompting the central bank to intervene and defend the IMF-imposed trading band. The US later stepped in with several support measures, reportedly including a $20 billion swap line with the central bank via the Exchange Stabilisation Fund and purchases of outstanding US dollar-denominated sovereign bonds. Despite these efforts, the peso ended the month 2.5% lower, among the worst performing EM currencies.

Elsewhere in EM, Russia intensified drone attacks on Ukraine, striking the main government complex in Kyiv for the first time, an act Ukraine’s foreign minister called a “major escalation”. Meanwhile, Israel carried out a highly controversial airstrike in Qatar, targeting a meeting of senior Hamas leaders. The strike, which marked the first known Israeli attack on Qatari soil, disrupted ongoing Gaza truce talks mediated by Qatar. The US issued rare criticism of the strike, marking a departure from its typical support for Israel. Prime Minister Netanyahu later issued an apology to Qatar, acknowledging the diplomatic fallout.

Rating changes were positive across the board once again. In Africa, Fitch upgraded Tunisia to B-, reflecting continued improvement in the country’s external position. S&P upgraded Morocco to BBB-, marking its return to investment grade after being downgraded to junk in 2010, driven by strong momentum in socioeconomic and budgetary reforms. Sri Lanka was the only country in Asia to be upgraded, with S&P raising its rating from SD (Selective Default) to CCC+ due to positive fiscal developments. The country’s budget aims to reduce waste and corruption while fostering investment and growth. In Latin America, Moody’s upgraded Costa Rica to Ba2 amid prospects for fiscal and debt improvements. S&P also upgraded Jamaica to BB due to stronger institutional and policy frameworks, and the Bahamas to BB- on the back of stronger-than-expected growth and improved tax compliance. Despite the positive rating actions, several countries had their outlooks revised to Negative, including Poland (Moody’s), Thailand (Fitch) and Trinidad & Tobago (S&P).

Outlook

We continue to see value in 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, we think a US slowdown could 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 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 companies 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.

One of the biggest risks to the asset class includes the imposition of new tariffs, which could hurt EM exports and global growth, as well as heightened uncertainty if the US Supreme Court rules the tariffs unlawful under the International Emergency Economic Powers Act. A US recession and a weaker 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.