Borrowing costs for top-rated emerging market (EM) governments and corporations have dropped to levels not seen since before the 2008 global financial crisis, as investors increasingly move away from traditional safe assets like U.S. Treasuries. This shift, reported by the Financial Times, marks a growing appetite for emerging market debt, driven by improved fundamentals and diminished faith in conventional havens.
The premium—or spread—that investors demand to hold investment-grade sovereign EM debt over U.S. Treasuries has narrowed to just 1.04 percentage points, while the spread for similarly rated corporate EM debt sits at 1.1 points. These are the tightest levels since 2007 for sovereign bonds and the lowest since just before Donald Trump’s 2016 U.S. presidential election for corporate spreads.
“The safe assets aren’t as safe as they used to be, and that is one factor pushing people into credit markets, including emerging markets,” said David Hauner, head of global EM fixed-income strategy at Bank of America. He cited strong global equity markets and a weaker U.S. dollar as additional drivers of the trend.
Investors are also reacting to concerns about U.S. fiscal health and political instability, including renewed criticism of the Federal Reserve by former President Trump. These factors, combined with steady economic improvements in select emerging markets, have encouraged a reevaluation of risk.
Spreads on JPMorgan’s Emerging Market Bond Index, which tracks both investment-grade and high-yield sovereign issuers, have fallen from 3.9 percentage points in April to just over 3 points—near the lowest levels since early 2020. Corporate equivalents have declined from 2.8 points to 2.05 points, nearing 2018 levels.
Despite the narrower spreads, yields on EM debt remain attractive, offering 7.3% for sovereign bonds and 6.3% for corporates—compared to just 4.3% on 10-year U.S. Treasuries.
One contributing factor has been the increasing activity of highly rated Gulf states such as Saudi Arabia, which is expected to be one of the largest EM debt issuers again this year as it raises capital for its massive infrastructure “gigaprojects” amid lower oil prices.
At the same time, riskier countries like Argentina and Pakistan have surprised markets by implementing difficult but investor-friendly reforms. “Emerging market investment grade spreads are tight relative to historical levels. However, the credit quality of the sector has also had a significant improvement in recent years,” said Shamaila Khan, head of EM fixed income at UBS Asset Management.
Citi analysts noted that markets seem largely unfazed by Trump’s revived threats of a global trade war, instead focusing on positive signals like robust Chinese growth, a softening dollar, and a general normalization in U.S.-China trade relations.
Aaron Grehan, co-head of EM debt at Aviva Investors, described the trend as part of a broader “convergence trade” between developed and emerging market credit. “Over the past two to three years we have seen increasing involvement of global investors in EM, especially in investment grade,” he said.
However, not all analysts are convinced the rally has room to run. Jonny Goulden, head of EM fixed-income strategy at JPMorgan, warned that if global growth expectations decline or inflation risks tied to tariffs rise again, spreads could widen quickly. “There is not much more room [for spreads] to grind tighter if recession risk remains low, but there is room to widen significantly if recession risk is back on the table,” he said.
Still, appetite for EM credit appears strong. A recent survey by consultancy bfinance found that 80% of institutional investors with EM bond holdings plan to maintain or increase exposure over the next 18 months. Notably, 43% of respondents still hold no EM bonds, suggesting further room for market inflows.
“Emerging markets have for many years been very under-owned,” BofA’s Hauner added. “If people don’t own as much, they have more room to keep adding risk in emerging market credit.”
