Why EMD has weathered the Treasury sell-off

 A quick recap

The US 10-year Treasury yield has climbed from below 4% in early March to above 5.2% at the end of September. Historically, that combination of higher US yields and tighter global financial conditions would have been expected to put significant pressure on EMD. 

Emerging market (EM) sovereign spreads are only around 9 basis points wider year to date, after a bout of widening in the final trading sessions of September. Against a rise of more than 110 basis points in the US 10-year yield, that is a modest move – and well short of the spread blowouts that have typically accompanied past Treasury sell-offs. Meanwhile, several parts of the asset class – particularly frontier markets and high-yield sovereign debt – have continued to generate positive returns.

The reason? EMD is increasingly driven by more than the direction of US interest rates.

US 10-year Treasury yield vs EMBI Global Diversified Index spread*, 2026 YTD

Treasury yields have risen sharply, while EM spreads have remained contained.

Primary markets remain open

Despite higher Treasury yields, EM issuers have continued to access markets and new supply has been met by healthy investor demand. Frontier issuers, including Ecuador, Gabon, the Democratic Republic of Congo and Pakistan, have all accessed the Eurobond market. This does not imply that default risk has fallen uniformly across frontier markets. But continued market access is important. It gives issuers another source of funding and refinancing. Demand for new deals demonstrates that investors remain willing to provide capital where yields and country fundamentals are sufficiently attractive.

Higher income – now 

Higher underlying Treasury rates mean new bonds are coming to market with more attractive all-in yields, giving investors greater income from the outset. Combined with still-light positioning in emerging markets following several years of outflows, this has helped create a supportive technical backdrop even as US yields have moved higher.

In other words, higher Treasury yields have raised the hurdle – but they have also improved the income available to investors willing to cross it.

More than a US duration trade

EMD is not a single market. Hard-currency sovereign bonds combine Treasury exposure with sovereign credit spreads. Local-currency debt is driven by domestic interest rates and currencies. Corporate bonds add company-specific fundamentals, while frontier markets are often influenced by reforms, International Monetary Fund programmes and country-specific developments. Those different return engines have been particularly valuable this year.

Longer-duration investment-grade sovereign debt has naturally been more exposed to rising Treasury yields. But frontier sovereigns have returned 3.97% year-to-date, sovereign high yield 2.23% and EM corporate high yield 3.29%, as carry and improving credit fundamentals have helped offset the rise in underlying US rates.

Frontier markets are a particularly good example. Their lower integration with global capital markets, shorter duration and greater sensitivity to domestic reforms mean returns can be much less dependent on the US Treasury cycle. Over the past two decades, frontier sovereign debt has shown very low correlation with US Treasuries. In an environment where US rates are dominating developed-market fixed income, that differentiation can be valuable.

EMD US Treasury Correlation 

Source: J.P. Morgan, 31 December 2025. Benchmarks used: EM Frontier = JPM NEXGEM, EM Hard Currency Corporates = JPM CEMBI BD, EM LC Sovereign = JPM GBI-EM GD, EM HC Sovereign = JPM EMBI GD. Indices are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. Individuals cannot invest directly in an index. For illustrative purposes only.

Local markets are also breaking the old pattern

The traditional playbook says higher US yields should mean a stronger dollar and weaker EM currencies. But that relationship has been far less straightforward this time.

Many EM central banks tightened policy earlier and more aggressively than developed-market peers, leaving relatively high nominal and real yields. At the same time, external balances and foreign-exchange reserves have improved across several countries. That has created opportunities in selected local markets. For example, high-carry frontier currencies including Paraguayan guarani, Kazakh tenge and Nigerian naira, have all generated strong positive returns against the US dollar this year despite the rise in Treasury yields. 

That does not make EM currencies immune to further dollar strength. But it does underline an important point: domestic fundamentals increasingly matter.

EM/FM currencies vs US dollar, 2026 YTD

Higher Treasury yields have not automatically translated into weaker EM and FM currencies.

Corporate fundamentals provide another buffer

EM corporates add another source of resilience. Balance sheets remain relatively healthy, with moderate leverage compared with many developed-market peers and solid interest coverage across much of the universe. Default rates are expected to remain contained into 2027, while EM corporate bonds also typically carry less duration than investment-grade sovereign debt. That combination of healthy fundamentals, shorter duration and attractive carry has helped EM corporate high yield deliver positive returns despite the Treasury sell-off.

Why EMD?

For investors, we believe three features stand out.

First, income. Yields across EMD are attractive at around 7.1% for broad hard-currency sovereign debt, 8.1% for sovereign high yield and more than 9% in frontier markets. That carry provides a meaningful cushion against market volatility.

Second, diversification. Sovereign credit, local rates, currencies, corporates and frontier markets respond to different economic and market forces. 

Third, fundamentals. Stronger policy frameworks, healthier external positions, solid corporate balance sheets and supportive investor demand mean many EMs are better equipped to withstand tighter global financial conditions.

Put simply, investors do not need to make a call that US Treasury yields have peaked to make the case for EMD. Higher US yields still matter. But EMD today has more ways to respond to them – through carry, credit, currencies, domestic rates and country-specific opportunities.