Emerging market debt: Myth vs. Market reality
Perceptions haven’t kept pace with reality in emerging market debt. A look at what recent performance, yields, and fundamentals reveal about the opportunity set.
Duration: 3 Mins
Date: Mar 02, 2026
EM debt entered 2026 in great shape. Across the asset class, we are seeing a range of positive dynamics. Hard-currency sovereigns, for example, are experiencing a wave of ratings upgrades, reversing a decade-long trend of downgrades.
Meanwhile, the US Federal Reserve is cutting interest rates, and growth expectations for EMs vs. developed markets (DMs) are widening. This should be positive for EM assets.
For some investors, there is still a perception that EM debt is an inherently risky asset class, with less attractive returns. So, let’s look at returns in 2025 and compare those in EMs with those in DMs.
EMs significantly outperformed in 2025 (Chart 1).
Chart 1. Total returns for emerging markets and developed markets in 2025 (%, GBP hedged)
The good news is that we also expect yields in EMs to keep outperforming DMs (Chart 2).
Chart 2. Yields for emerging markets and developed markets in 2025 (%)
Hard-currency sovereigns
Momentum building
Even though yields in EM hard-currency bonds have tightened, they still offer more income than US high yield (HY) bonds. Crucially, many EM governments have regained access to global debt markets, and investors from across the credit spectrum are showing renewed interest.
That combination has helped boost demand and support recent performance. We expect this positive trend to continue in 2026. Frontier markets are showing real promise. Many have emerged stronger from the turbulence of the pandemic.
From Ghana’s gold-driven recovery to Egypt’s reform progress, government spending has improved, foreign exchange reserves are healthier, and debt profiles are more sustainable. Few frontier economies record large trade surpluses with the US, which means that returns are driven more by their domestic conditions. Yields on frontier bonds at an index level remain at an attractive 9.1%.1
Emerging market hard-currency corporate debt
Steady as she goes
On the corporate side, fundamentals are robust. At an index level, the asset class boasts an average investment-grade rating. Demand for EM corporate debt is currently outpacing supply, which has translated into solid returns for investors. In recent years, EM corporate behavior has not transitioned towards an aggressive stance. This is reflected in debt levels that are at their lowest point since 2008 and remain below that of European and US counterparts.
At an index level, yields in EM corporate debt have been falling and are now just below 6%.1 But valuations in the HY market look compelling compared with DMs – EM corporate HY currently has a yield of 7.5% vs. 7.0% in US HY.
Emerging market local-currency debt
More upside to come
Despite some recent depreciation, the dollar remains expensive, which means yields in EM local markets are attractive. This environment offers retail investors the potential for both income and currency appreciation – a combination that is relatively rare in today’s markets.
Within the widely followed JP Morgan EM Local Currency Index, we forecast that eight to ten of the central banks will remain in rate-cutting mode in 2026.2 There is also scope for cuts in frontier countries, especially where central banks have delivered large rate hikes to fight inflation and where rates are now very high (e.g., Nigeria, Ghana, Egypt, and Kazakhstan).
Final thoughts
We believe EM debt offers investors diversification, attractive income, and exposure to faster-growing economies. After a very strong 2025, yields remain compelling relative to DM bonds. For retail investors looking for income and diversification beyond traditional global bonds, EM debt offers a compelling opportunity.
Endnotes
1 JP Morgan, January 2026.
2 The JP Morgan EM Local Currency Index is designed to track the performance of eligible local currency denominated central government debt issued by emerging markets countries.
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).
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