Does EM Debt Now Look More Orthodox than Developed Markets?

Jason DeVito, CFA
Vice President, Senior Portfolio Manager

Mohammed Elmi, CFA
Senior Portfolio Manager

US Treasury yields are near multi-decade highs and the Fed has begun tightening policy, boosting the appeal of emerging markets' real yields and constructive policy backdrops.

When talking about the difference between emerging markets (EM) and developed markets (DM), one thing we can say for sure is how much the narrative has evolved in recent years.

Historically, many EMs were prone to common vulnerabilities, including commodity dependence, currency pegs that were prone to breaking, and reliance on foreign capital inflows.

Following the 2008-09 global financial crisis, however, that began to change. Emerging markets began to adopt inflation-targeting regimes and fiscal rules, while also tightening macroprudential regulation. These post-crisis reforms brought greater macroeconomic stability to this category of countries, improving their capacity to absorb external shocks and helping several countries secure access to International Monetary Fund (IMF) lending instruments. A more detailed analysis of this evolution is available in our previous report: Will EMD outperformance continue in 2026?

Here, the contrast with developed markets is telling. Where once DMs were viewed by investors as a source of stability, today some remain constrained by sticky inflation, wider fiscal deficits and higher long-dated bond yields. Indeed, we believe it’s fair to say that many emerging markets entered the second half of 2026 with more orthodox policy settings, healthier real yields and comparatively better inflation dynamics than their developed market peers.

Figure 1: Emerging market dollar-denominated sovereign bond spreads relative to US Treasuries

Meanwhile, the purchasing power of the dollar has entered a decline, turning persistent US twin deficits into a structural tailwind for local-currency EM debt (Figure 2). From here, we believe that large fiscal deficits alongside a current-account deficit can continue to weigh on the dollar, encouraging investors to diversify internationally and reassess the defensive portion of their portfolios.

Figure 2: US dollar purchasing power in decline

That compression may point to a structural improvement in perceived credit quality, but it has not brought EMD and developed-market debt into lockstep. Over the past 10 years, EMD (J.P. Morgan EMBI Global Diversified Composite Index) has shown a correlation of approximately 0.68 with the Bloomberg US Aggregate Bond Index and roughly 0.75 with the Bloomberg Global Aggregate Index. Returns are being shaped by a distinct mix of local policy, currency and growth factors rather than moving in tandem with developed-market rate and credit cycles.

That lower correlation underpins the diversification case: investors can gain access to return drivers not wholly dependent on the macroeconomic forces shaping developed-market fixed income. This differentiation can be especially valuable in a world where major indices are dominated by a handful of US technology companies. Those firms have delivered exceptional returns, but they can also expose investors to an element of concentration.

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