While geopolitical concerns and trade uncertainty are likely to continue weighing on investor sentiment over the near term, emerging market (EM) fixed income continues to offer compelling selective opportunities. Taking advantage of them, however, will require careful navigation of the markets amid heightened volatility.
Emerging economies are benefiting from resilient fundamentals and generally stronger growth relative to developed market (DM) peers. Combined with the expected resumption of the rate cutting cycle in most EM countries and in the US (albeit at a slower pace), this environment is likely to support the asset class during the second half of the year.
Hard currency EM bonds
- Fundamentals: EM credit fundamentals across both sovereign and corporate issuers remain largely intact. For sovereign issuers, many EM countries maintain healthy balance of payments and are more prudent in external debt issuance and fiscal policies. According to Fitch, EM sovereigns saw moderate net positive rating actions over 2024. As for EM corporates, many issuers are maintaining lower levels of net leverage and have higher interest coverage ratios versus their developed market peers.
- Valuations: We see EM spreads offering better value than developed markets. However, we recognise generic spreads as currently less appealing compared to the earlier part of the year, and some EM corporate credits have become more expensive. We are focusing on idiosyncratic names and selected frontier markets, which we believe offer more attractive opportunities. We believe that investment-grade credit spreads for some issuers have become expensive and therefore remain selective.
- Technicals: We expect a moderate supply of bonds in 2025, which should provide support for EM bonds. We already saw strong inflows in 2024 and so far in 2025, and we expect this to continue for the remainder of the year.
- Duration: We see US duration risk as broadly balanced. For the Federal Reserve, the focus remains on the inflation data and President Trump’s policy agenda. While the central bank may not be inclined to cut rates further, signs of a weakening economy could change the Fed’s mind. In our hard currency portfolios, our duration positioning is neutral.
Local currency EM bonds
- Fundamentals: We anticipate EM growth remaining resilient, with several economies moving into an easing cycle that will support growth.
- Valuations: We believe the segment offers selected opportunities over the short and medium term. We expect a number of EM central banks to move toward a more accommodative stance. Valuations in some local markets (e.g., Latin America and frontier) also look appealing.
- EM Foreign exchange: We anticipate USD weakness over the short term. Additionally, EM currencies are expected to benefit from a more resilient EM growth outlook and a wider growth differential between emerging and developed markets over the medium term. Some EM currencies look attractively valued, but we are applying a more selective approach to find near-term opportunities.
- Technicals: Demand/supply dynamics within local currency EM bonds generally tend to be driven by local investors (e.g., central bank/reserve managers, pension funds, insurance companies), who provide a stable demand base. 2025 is a “refinancing year” for several economies and in those cases gross issuance could be large relative to history.
This is an extract from our Q3 2025 quarterly fixed income outlook – full document.
