A weaker dollar and FED easing cycle are fueling strong performance and renewed inflows into emerging market fixed income. Solid fiscal reforms and improving credit metrics further enhance the appeal, especially in key markets within a heterogeneous universe.
A weaker dollar environment and FED easing cycle are creating favorable conditions for emerging market fixed income.
- Market Performance and Inflows: Emerging Markets Debt (EMD) have regained their position atop the fixed income performance tables YTD: the EMD Local Currency Index has returned +13.82%, the EMD Hard Currency Index +8.73%, and the EMD Corporates Index +6.49% (see the table below), with inflows starting to come back to the asset class after years of record outflows−Since April, net inflows into EMD Funds have totaled over 19 billion USD.
- Fiscal Reforms and Debt Sustainability: Emerging Markets countries have shown orthodox policymaking on average and appetite for reforms to the benefit of fiscal trajectories and debt sustainability, against a backdrop of more unpredictable policymaking in the US.
- Attractive Yields: The yield pickup of emerging versus developed markets remains compelling, especially in the context of improving credit metrics and rating upgrade trends across many Emerging Markets issuers. Across EM countries, we have observed 11 net upgrades recorded so far in 2025 year-to-date (data as of 31st August 2025). We see EM local bonds standing out as attractive, with elevated real yields and tailwinds from benign EM inflation dynamics and rate cut cycles.
- Alpha generation: Sizable local yield valuation differences between countries should enhance potential for alpha generation; we see the best opportunities in Brazil, South Africa, and a range of frontier markets with positive credit trends.
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