As we enter the final quarter of 2025, emerging market (EM) debt continues to demonstrate resilience against a complex global backdrop. Despite rising policy uncertainty, geopolitical tensions, and evolving trade dynamics, EM debt has largely outperformed other fixed income asset classes so far this year. In this note, we evaluate the drivers behind EM debt’s strong returns, assess the sustainability of current trends, and outline the key risks and opportunities for the remainder of the year.
Key takeaways
- With inflation falling across many emerging markets, central banks have begun adopting more accommodative stances, evidenced by rate cuts and declining average policy rates.
- A weaker US dollar since early 2025 has providing EM central banks greater flexibility, boosting the appeal of EM currencies and encouraging capital inflows into EM bond funds.
- While emerging markets have become adept at tuning out frequent policy noise, especially from the US administration, we remain alert to the risk of sudden shocks.
EM debt has delivered robust returns so far in 2025
EM debt has posted strong returns in 2025, driven by a confluence of supportive factors. With inflation trending lower across many EMs, central banks have begun adopting more accommodative stances, evidenced by widespread rate cuts and declining average policy rates. Earlier concerns about currency depreciation, especially against a strong US dollar, had constrained easing in some regions. However, the dollar’s weakening since early 2025 has alleviated those pressures, providing central banks greater flexibility. This shift has boosted the appeal of EM currencies and encouraged capital inflows into EM bond funds.
Developed market (DM) central banks have also continued to lower policy rates, providing EM central banks additional room to cut. During his remarks at the Federal Reserve’s annual Jackson Hole symposium in August, Chair Jerome Powell indicated that a rate cut could be on the horizon. The baseline scenario assumes that tariffs will cause a one-off increase in the overall price level, rather than triggering a sustained inflationary trend.
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Supporting documents
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