Emerging markets bonds outperform developed peers as global rout deepens

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Emerging markets bonds outperform

Highlights

Emerging markets sovereign local-currency bonds outperformed with an 18 per cent gain in 2022 and 3.5 per cent up to August 2023, while developed-market bonds fell 4.5 per cent year-to-date.
Yields on 10-year U.S. Treasuries rose from 4.8 per cent to 5.3 per cent in the past month, but yields in countries like South Africa and Chile increased less, and Brazil's yields fell.
The new JPMorgan index for frontier-market local bonds would have gained between 7 and 8 per cent this year, while S&P Global warns Argentina and Egypt remain vulnerable due to large short-term debt rollovers.

Resilience driven by reforms and policy credibility

As reported by Financial Times, investors are increasingly betting that many emerging markets are less exposed than in previous cycles to the risk of higher U.S. interest rates pulling capital away. Market participants say painful fiscal reforms, stronger central banks and finance ministries, and a readiness to raise rates early have improved the ability of many countries to withstand the latest jump in global yields.

Werner Gey van Pittius, co-chief investment officer for fixed income at Ninety One, says emerging markets are showing greater resilience than expected. Eva Sun-Wai, portfolio manager at M&G, says fiscal discipline has arguably been stronger in emerging markets and that their handling of inflation after Covid has reassured investors.

Yields on 10-year U.S. Treasuries have risen from 4.8 per cent to 5.3 per cent in the past month. Yet sovereign yields in countries such as South Africa and Chile have increased by less, while in Brazil they have fallen, underlining a widening divergence with developed-market debt.

Sovereign local-currency bonds in emerging markets gained 18 per cent last year and were up 3.5 per cent this year to the end of August, according to a JPMorgan benchmark index. The global sell-off in September leaves the index flat for the year to date, but that still compares with a 4.5 per cent decline for developed-market bonds on a Bloomberg benchmark index.

Wider divide emerges across borrowers

Luis Costa, global head of emerging markets strategy at Citi, says the asset class is holding up well given the shock, even though broad emerging-market debt indices have lost ground over the past month. He warns that a sell-off in U.S. equities, similar to 2023, could weaken demand for risk assets including emerging markets, although U.S. stocks continue to draw support from the AI theme and rising earnings expectations.

In local-currency debt, higher oil prices and inflation this year are prompting many central banks to keep domestic interest rates, and therefore real yields, relatively high. Harriet Ballard, multi-asset portfolio manager at Aviva Investors, says she is positioned for emerging-market local currencies to outperform the dollar because of a more positive regional growth outlook.

South Africa central bank governor Lesetja Kganyago says reforms to restrain debt and inflation are important in shielding the country from the 2026 global bond repricing. He says the current long-term rand bond yield of about 9 per cent is roughly where it stands at the end of 2025 and remains below earlier levels, even as U.S. Treasury yields reach their highest in decades.

Investors are also keeping exposure to frontier local-currency debt, including oil exporters such as Nigeria and Kazakhstan. A newly launched JPMorgan index for frontier-market local bonds would have gained between 7 and 8 per cent this year based on pricing data.

S&P Global analysts say countries such as Argentina and Egypt remain especially vulnerable because they must roll over large volumes of short-term debt, while South Africa, Thailand and Malaysia benefit from deeper domestic capital pools that reduce reliance on dollar borrowing. Bank of America analysts say investors have historically tended to sell emerging-market dollar bonds when the yield on the JPMorgan index reaches 8 per cent, versus 7.2 per cent currently, suggesting the pressure point has not yet been reached.

Our earlier article on Nigeria’s $5 billion financing arrangement with First Abu Dhabi Bank explained how the government aims to boost liquidity and secure cheaper funding to support stability and investment. It also outlined plans to channel the funds into infrastructure, job creation, and local business support, while strengthening investor confidence and access to external capital.

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