Not only this year are bonds from emerging markets an attractive alternative to the volatile debt of developed economies. European asset managers are seeing a structural shift in the financial policies of these countries. Amundi has even recently merged its emerging markets and developed markets teams.
Emerging markets are experiencing an exceptionally strong year for bonds. Debt in local currency shows a gain of about 14 percent, and in hard currency of 6 percent. The weaker dollar and interest rate cuts by the US Federal Reserve are providing strong support.
But according to Alessia Berardi, head of Emerging Macro Strategy at Amundi Investment Institute, the movement is more fundamental than that. “Even before the rate cut in September, the asset class was already performing strongly,” she said. “We see a structural trend: emerging countries have their finances better under control, while the vulnerability of developed economies is increasing. The boundaries between the two worlds are blurring.”
“Central banks in emerging countries have learned from the hard lessons of the 1980s, when inflation ran out of control,” Berardi said. “They are showing more discipline now than in the past and have become more inward-looking, making them less dependent on the Fed’s policies.”
Uday Patnaik, head of Asia Fixed Income and Global Emerging Market Debt at L&G, has seen this structural change mainly since the pandemic. “In general, emerging countries have pursued more responsible policies,” he said. “They raised rates faster to curb inflation and are now also leading with rate cuts.”
Berardi cites Brazil as an example. “That country began raising rates when the Fed started cutting them a year ago. The real interest rate there is now around 8 percent, leaving ample room for further cuts,” she said.
Old labels, new reality
The term “emerging market” dates back to 1981, coined by a World Bank economist as a friendlier alternative to “Third World.” But more than forty years later, it no longer reflects the reality. The global economy has changed, and that transformation is mirrored in financial markets.
“In the early 1990s, emerging markets accounted for about twenty percent of global GDP,” Patnaik said. “Today, that figure is around fifty percent. The debt market of those countries has grown into the largest credit market in the world, with a total size of 29,000 billion dollar—about 4,000 to 5,000 billion in hard currency and 24,000 billion in local currency.”
Growth of total debt volume in emerging countries
For Amundi, Europe’s largest asset manager, it was logical to merge the teams for emerging and developed markets. “The convergence between the two markets and changing client needs call for integration within the fixed income and equity platforms,” the company says.
Still, the “emerging” label stubbornly sticks. “Countries like the United Arab Emirates are no less creditworthy than France,” Patnaik said, “yet they are still priced as riskier. That offers opportunities for investors, with an attractive pick-up at an almost identical risk profile.”
Alexis de Mones, bond portfolio manager at Ashmore Group, observes the same pattern. “Adjusted for risk, EM debt performance has been strong for a while relative to DM bonds,” he said. “EM debt volatility has been declining structurally while developed countries’ unsatiable fiscal profligacy is creating headwinds for the performance of DM bonds.” According to De Mones, the risk-adjusted return of the asset class has been attractive for some time. “The Sharpe ratio of government debt in EMD has been 0.45 over the past twenty years, and that of EM corporate bonds 0.48. By comparison, US investment-grade bonds reach only 0.19, while European equivalent reaches 0.33.”
Creditworthiness
Meanwhile, concerns are growing about the ability of developed markets to finance their government debt. “The long end of the yield curve in developed markets is rising sharply,” Patnaik said. “That is a clear signal from the financial markets that the willingness to continue financing that government debt is declining.”
The contrast with emerging economies is stark. The average debt ratio there is only 65 percent of GDP, compared to 125 percent in the G7. While they are consolidating their budgets, developed countries are receiving warnings from credit rating agencies. For example, in May 2025 Moody’s downgraded the United States from Aaa to Aa1, and in September Fitch downgraded France from AA- to A+ due to rising deficits and political tensions.
According to M&G Investments, emerging markets experienced their strongest year for rating upgrades since 2011 in 2024: fourteen countries received an upgrade. The credit quality of emerging markets is improving, just as that of the developed world is deteriorating.
Risks remain
Although the fundamental position of emerging markets is strong, their fate remains partly linked to the Fed’s policy. An unexpected tightening or delay in rate cuts could dampen the EMD rally. “If the Fed turns out to be hawkish, risk assets will suffer,” Patnaik said. “But investment-grade EM debt can withstand that relatively well.”
“A substantial sell-off in US equities would also be problematic,” Patnaik added. “In such a scenario, risk assets tend to correlate strongly and fall together.”