Insights
The Investment OutlookEmerging market debt: How Trump's return is shaping opportunities
Emerging markets are adapting to Trump’s return to office, navigating tariffs, and volatility. Will resilient economies and high yields create new opportunities for investors in 2026? Discover what’s driving emerging market debt now.
Authors
Leo Morawiecki
Associate Investment Specialist, Fixed Income
Robert Gilhooly
Senior Emerging Markets Economist
Part 5 of
The Investment Outlook
Duration: 6 Mins
Date: Nov 13, 2025
For emerging markets (EMs), the past 12 months have been a rollercoaster – marked by volatility, resilience, and adaptation.
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 to office, 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.1 The justices began deliberations in early November, with a decision expected by year end.
Looking ahead to 2026
US trade policy and the pace and extent of US 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 labor 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 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 EM debt?
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.2,3,4,5 In the frontier space, yields exceed 10% – a handsome return relative to almost all other areas of the bond market.6,7
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.8 Flows had bottomed out at -$9.8 billion in April but are now up to $4 billion year to date, according to JP Morgan.9,10
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 in 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 Emerging Markets Global Diversified Index has returned over 15% in 2025 (as of October 17, 2025), with foreign exchange (FX) gains contributing over 6% (Chart 1).9,10 Fund flows into local currency strategies total over $7 billion – modest, but a marked improvement on previous years.
Chart 1. Positive returns in local currency in Q3 driven mostly by bonds
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 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 to office 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’s first term in office. 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.
Endnotes
1 The International Emergency Economic Powers Act (IEEPA) is a United States federal law authorizing the president to regulate international commerce after declaring a national emergency in response to any unusual and extraordinary threat to the United States which has its source in whole or substantial part outside the United States.
2 The MSCI Emerging Markets High Dividend Yield Index is based on the MSCI Emerging Markets Index, its parent index, and includes large and mid cap stocks across emerging markets countries.
3 MSCI Emerging Markets High Dividend Yield Index, October 2025.
4 The ICE BofA US High Yield Index tracks the performance of US dollar-denominated below investment grade rated corporate debt publicly issued in the US domestic market.
5 ICE BofA US High Yield Index, October 2025.
6 J.P. Morgan Next Generation Market Index (NEXGEM) is a fixed-income benchmark that provides exposure to non-investment grade rated, smaller, less liquid population of frontier economies, including 18 countries representing various regions such as Sub-Saharan Africa, Central American, the Caribbean, Middle East, Europe, and Asia.
7 J.P. Morgan Next Generation Market Index, October 2025.
8 "Emerging Markets Rush to Debt Markets to Grab Risk-On Moment." Bloomberg, September 2025. https://www.bloomberg.com/news/articles/2025-09-07/emerging-markets-rush-to-debt-markets-to-seize-risk-on-moment.
9 The JP Morgan GBI Emerging Markets Global Diversified Index is a comprehensive global local emerging markets index comprising liquid, fixed‐rate, domestic currency government bonds.
10 JP Morgan GBI Emerging Markets Global Diversified Index, October 2025.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Standard & Poor’s credit ratings are expressed as letter grades that range from “AAA” to “D” to communicate the agency’s opinion of relative level of credit risk. Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from AAA to BBB-.
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