Emerging markets fixed income

Over the past two decades, emerging-market (EM) fixed income has evolved from the volatility of the 1990s and early 2000s into an asset class characterized by strong fundamentals, disciplined policy mixes and effective structural reforms.

With uncertainty around company valuations as well as divergence in monetary policy and global business cycles, investors are rethinking their asset-allocation strategies – and EM debt markets offer a mixture of diversification and attractive return opportunities.

Over the last 15 years, the size of the EM sovereign hard-currency debt market has more than doubled – from around USD 700 billion in the early 2010s to USD 1.8 trillion today, according to data from JPMorgan. EM corporate hard-currency debt has grown at an even faster rate and is now valued at USD 2.6 trillion – just over half of which is rated as investment grade.

Over the same time period, EM local-currency debt for sovereigns and corporates has grown to become the dominant segment of EM debt, as shown in Figure 1 below. JPMorgan GBI-EM Index (local-currency debt) has become more representative of the investment universe, with China and India being added in 2020 and 2024, respectively.

Figure 1: EM fixed-income market

Through this period, emerging market economies including frontier countries have grown by more than 4% a year on average, and companies domiciled in these countries have generally benefited accordingly. This growth has not been achieved solely through increased spending. As per IMF data, net government debt on average for advanced economies is above 80%, while for emerging and middle-income economies it hovers close to 45% (see Figure 2 below).

Figure 2: Government net debt forecast

When looking at historical investment returns, it is helpful to look at the Sharpe ratio: this measures how much excess return investors receive for the volatility of holding a riskier asset, and is an objective metric for risk-reward. Using data from the 2003-25 period, the return profile for hard-currency emerging-market sovereign and corporate debt is significantly above that of sovereign debt issued by the US, other DM sovereigns and US investment-grade companies, even during a period that was marked by US exceptionalism and dollar appreciation.

Figure 3: Sharpe ratios

Source: Bloomberg Indices. EMD IG Sovereign: JPGCIG Index, EMD IG Corporate: JBCDIGIG Index, US IG: LUACTRUU Index, EMD HY Sovereign: JPGCHY Index, EMD HY Corporate: JBCDNOIG Index, US HY: LF98TRUU Index, EMD Sovereign: JPEIDIVR Index, EMD Corporate: JBCDCOMP Index, EMD Local: JGENVUUG Index, EMD Local FX-Hedged: JGENVHUG Index, S&P-500: SPTR Index, MSCI World: MXWO Index, MSCI EM Equities: MXEF Index, US Treasuries: LUATTRUU Index, Global Treasuries: LGTRTRUU Index. All indices are in US dollar terms.

^1. Return calculated using Bloomberg indices.
^2. Measured by standard deviation.
^3. Ratio of return divided by risk. Past performance does not predict future performance. This does not constitute a guarantee by UBS Asset Management.

Default rates have peaked for EM sovereigns, which should be a tailwind for performance. The wave of defaults through the pandemic and in the wake of the Russian invasion of Ukraine is behind us; there have been no sovereign defaults since the end of 2023, and we do not anticipate any material sovereign defaults in 2026. Corporate defaults have also been decreasing over the last couple of years. The outlook from credit rating agencies with regard to EM debt has become increasingly positive, with ratings upgrades significantly exceeding downgrades (see Figure 4 below). At the same time, sovereign markets boast a number of ‘rising stars’: credits that are expected to receive investment-grade ratings from at least two of the three major rating agencies, with Oman and Azerbaijan being recent examples. A number of EM sovereigns have emerged from default over the last couple of years, including Ghana, Sri Lanka and Zambia.

Figure 4: Favorable credit ratings and fewer defaults

Source: UBS Asset Management, JPMorgan and Bloomberg as at Aug 2026

EM hard-currency debt has outperformed similarly rated US corporate debt on a year-to-date 2026 basis and over the course of 2025 as a whole, despite geopolitical turbulence and President Trump’s tariff announcements. Emerging market central banks were more proactive after the Covid-19 pandemic and inflation came down much more rapidly in emerging markets than in developed economies. Furthermore, real rates are generally high in emerging markets: this provides EM central banks with significant leeway to cut rates aggressively in order to manage periods of weaker growth. Debt issued by Asian countries should generally be supported by their strong external positions.

EM sovereign and corporate debt indices, unlike equity indices, are constrained at the country level. As of the end of August 2026, Saudi Arabia had the largest weight in the JPMorgan EMBI Global Diversified Index at 5.20%, followed by Mexico at 5.15%. Equivalent country exposures for the JPMorgan CEMBI Broad Diversified Index stand at 5.95% for China and 5.19% for Hong Kong. This relatively low country concentration risk contrasts with global equity portfolios, many of which have significant exposure to US stocks, and global EM equity portfolios tracking the MSCI Emerging Markets Index – these have more than 80% exposure to stocks in China, Taiwan, India, South Korea and Brazil. Further, frontier countries such as Argentina, Egypt, Nigeria and Ukraine are already an important part of debt indices, accounting for almost 33% of the JPMorgan EM Sovereign Debt Index and a little over 13% in the JPMorgan EM Corporate Debt Index.

Emerging market fixed income remains attractively valued relative to other fixed income sectors, driving strong crossover demand and inflows that we expect to continue. Index yields are near the top of their 15-year range, while hard currency EM sovereign and corporate debt indices have delivered high single-digit annualized returns over the past three years. A stable or weaker US dollar would provide a significant tailwind for EM debt, a backdrop that has largely been absent over the last decade.

There are also several potential catalysts for further upside, including easing geopolitical tensions, ceasefire agreements and stabilization in China. In this environment, we believe the backdrop remains supportive for EM sovereign and corporate dollar-denominated debt. Local currency debt should also benefit over the long term, although periods of dollar strength could create short-term volatility.

Despite the uncertainty of potential tariffs, growth prospects for countries such as Mexico and Poland are likely to improve, led by a pick-up in near-shoring and friend-shoring activities as well as in foreign direct investment, as businesses adjust their global supply-chain strategies. As per IMF forecasts, annual growth in emerging markets is still expected to be stable around the 4% mark (see Figure 5 below), despite a projected slowdown in the US economy. China’s growth has remained resilient despite trade tensions, and commodity prices have stayed elevated even during slower growth periods.

Figure 5: EM-DM growth differential

Technical factors also remain supportive. US policy uncertainty has driven increased allocations to EM, with inflows reaching a four-year high in 2025 and a further USD 34 billion year-to-date in 2026. At the same time, net issuance of EM external debt is expected to remain constrained thereby, supporting bond prices. Investors remain underweight the asset class given the material outflows seen between 2022 and 2024, but interest and inflows are increasing globally, creating an additional tailwind for returns.

Figure 6: Positive technical factors for emerging market debt

Source: JP Morgan as at July 2026 | JP Morgan as at August 2026

Code: M-006953