Executive Summary
This is an extract from Eastspring Investments’ “Emerging Market Debt: Opportunities, positioning & risks; A practical guide for investors.”. Click here to download the full report.
For much of the decade following the Global Financial Crisis and especially during 2020-2021, historically low Developed Market (DM) bond yields have prompted investors to seek income from higher yielding asset classes. Today, although DM yields have risen, it does not diminish the investment case for Emerging Market Debt (EMD). The EM-DM distinction has blurred and beyond yields, EMD can provide additional sources of return, increased diversification and greater alpha generation.
The blurring distinction between EM and DM
Over the years, many EM economies have lowered their debt burdens, improved their inflation credibility and strengthened their growth prospects. On the other hand, many DMs are increasingly weighed down by rising fiscal risk, inflation uncertainty and bond supply pressures. Fig. 1. As such, DM bonds may not always provide the same defensive role they have historically played in investor portfolios.
Fig. 1. Improving EM fundamentals is blurring the distinction between EM-DM
Source: Eastspring Investments, S&P Global Ratings, Bloomberg, respective Sovereign’s central bank website. Estimates as of 14 July 2025.
Lower debt burdens. Developed market yields have risen partly because of growing concerns over fiscal and debt sustainability. The International Monetary Fund expects G7 fiscal deficits to stay elevated and for their gross government debt to GDP ratio to rise significantly over the coming years as social and defense spending increases.
In contrast, EM governments, while not immune to fiscal pressures, are generally expected to remain less indebted than DMs. Some EM countries had pursued more measured post-pandemic fiscal support, which reduced inflation persistence, allowing central banks to regain policy flexibility earlier. Fig. 2 and 3.
Fig. 2. EMs’ fiscal deficit peaked at 8% of GDP post COVID
Source: Eastspring Investments, IMF World Economic Outlook, April 2026.
Fig. 3. EMs expected to be less indebted than DMs
Source: Eastspring Investments, IMF World Economic Outlook, April 2026.
Improved inflation credibility. Although the Middle East conflict has added to inflationary pressures globally, the inflation rates across most major EMs remain within communicated central bank ranges except for selected economies which are more vulnerable to higher energy prices e.g. Philippines. Over the past years, several large EM central banks have also lowered/narrowed their inflation target ranges which have contributed to greater currency stability, making their local debt markets more attractive. On the other hand, inflation in several DMs is above target. DM’s larger fiscal needs and structurally higher social spending may also challenge the path to sustainably lower inflation. Fig. 4.
Fig. 4. Inflation across major EMs remain within central bank target ranges
Source and date: Eastspring Investments, Bloomberg, respective central bank websites. As of 22 July 2026.
Favourable growth prospects. EMs’ growth prospects are underpinned by favourable demographics, productivity catch-up, commodity endowments, manufacturing depth, digitalisation and regional reform stories. Over the next 5 years to 2031, EMs are expected to:
- Grow by an average of 2.4% p.a. faster than DM economies
- Generate almost 75% of nominal global growth
- Expand population 3x faster than DMs
- Drive majority of new global consumption and middle-class growth
- Gain market share in global manufacturing and trade
Improving growth prospects and rising exports have helped EMs’ current account balances and net reserve assets trend up since 2015. Fig. 5 and 6. On the other hand, the Group of 7 has increasingly exhibited signs of external imbalances.
Fig. 5. EMs’ current account balances have improved since 2015
Source: Eastspring Investments. IMF World Economic Outlook, April 2026.
Fig. 6. EMs’ net reserves have been rising since 2017
Source: Eastspring Investments. IMF World Economic Outlook, April 2026.
Greater diversification. EMs comprise of over 70 countries that are highly diverse in terms of economic structure, demographics and stages of development. As such, EMD is not dependent on one macro path and can offer greater portfolio diversification. Our analysis shows that EMBIGD returns have a weak correlation (0.32) with US Treasuries, and lower correlations with other major equity markets than comparable US and European High Yields. Fig. 7.
Fig. 7. EMD’s low correlations improve portfolio diversification
Source: Monthly correlations (total returns) – Jan 2006 – June 2026. Bloomberg. Eastspring Investments. JP Morgan EMBI Global Diversified Composite. Bloomberg US Corporate Bond Index. Bloomberg US Corporate High Yield Bond Index. Bloomberg Pan-European Aggregate Corporate Index. Bloomberg Pan-European High Yield Index. MSCI World. S&P 500 Index. MSCI Europe Index. MSCI AC Asia ex Japan Index.
Key takeaways
Reassess the EM-DM divide. Improving EM fundamentals and rising DM fiscal pressures are blurring the traditional distinctions between EMD and DM bonds.
Reframe EMD as a strategic complement to DM bonds. EMD can enhance income, provide access to a broader set of macro and credit opportunities as well as increase portfolio diversification.
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