The past – what just happened?
Despite recent equity market volatility, emerging market debt (EMD) has maintained its strong momentum over 2025, delivering strong returns. As of 31 December, EM hard currency sovereign bonds gained 14.30% year-to-date, while corporates were up 8.72%. These results have been driven primarily by movements in US Treasuries - benefiting sovereigns in particular - alongside additional support from spread tightening, especially within the high-yield sovereign segment. EM local markets outperformed over the same period, posting a 19.3% return, supported by a weaker US dollar.

The present - positioning and performance
With resilient growth across emerging markets as per the International Monetary Fund, declining inflation and a robust external sector, we maintain our constructive stance on EMD. Our confidence is underpinned by structural improvements now being reflected in credit rating trends. Upgrades have outpaced downgrades in 2025, signalling positive momentum. There were no sovereign defaults in the last two years. We expect aggregate default probability to be very low in 2026 whereas EM corporate default is forecasted at less than 3% in 2026.

From a valuation perspective, spreads have tightened steadily throughout the year, leaving us asking the recurring question: how tight is too tight as they approach historic lows?

Read the full ‘Thought Leadership’ article at the link below