“Emerging Market Bonds – A Checklist for Investors”

Rising debt levels, skyrocketing deficits, and rising inflation—bonds from developed countries are under pressure. Do emerging-market bonds offer investors a better deal? Perhaps, but it’s important to pay attention to the finer details, as Ali Masarwah, fund analyst and managing director of the consulting firm envestor, illustrates with a checklist.

By mid-May, the moment had arrived: yields on German, U.S., and British government bonds had climbed to alarmingly high levels—10-year Bunds were yielding 3.20 percent, their U.S. counterparts had risen to 4.6 percent, and British gilts were yielding around 5.2 percent. Talk of unsustainable debt is becoming increasingly common. This is where typical fund marketing kicks in: It’s a good thing we have the option of solid emerging market bonds: Emerging markets are less indebted than developed countries, grow faster, and have healthier demographics. At the same time, their bonds offer high interest rates, which in turn strengthens their currencies.

You’ve noticed: this reversal of roles is a gross exaggeration. But the direction of the narrative is correct: in light of turbulent domestic bond markets, many investors are recognizing the advantages of emerging market bonds. Meanwhile, inflows into funds and ETFs for emerging market bonds are rising rapidly. So it’s time to ground the discussion. Five myths about emerging market bonds that we’d like to examine more closely:

1. “Emerging markets are performing solidly and growing their way out of debt.”

Yes, it is true that, on average, debt levels in emerging markets are lower than in developed countries, but even in the Global South, debt has been rising steadily since the COVID crisis, while trend growth is declining. Many countries have little fiscal leeway because social spending, subsidies, and defense budgets are rising in the Global South as well. The current energy crisis will not improve this situation.

2. “Local EM bonds are simply high-yielding bonds.”

High coupons are one thing; currency risks are another. The yields on EM bonds are not always high enough to offset currency losses. In 2025, it was a close call. Bond performance depends on three factors: currency, coupon, and price. Sometimes, two of these factors drag performance down at the same time. Price losses in the wake of the Iran war a few weeks ago also weighed on the performance of EM bond funds.

3. “Emerging markets are getting a handle on monetary policy governance.”

For decades, emerging markets have lived under the sword of Damocles in the form of inflation and high deficits. They have learned their lesson. Institutions have been stabilized, central banks modernized, and transparency has improved. But emerging markets are not reforming to please investors from the Global North. Banks and industries are often state-affiliated, corruption has not been defeated, and when in doubt, defaults occur—as happened not so long ago in Argentina, Zambia, Sri Lanka, and Lebanon. Pakistan is repeatedly on the brink, and Russia has been in (technical) default since 2022.

4. “Low debt = high security.”

Debt in emerging markets may be lower than here, but it has also been rising for years, and shocks hit countries with weak institutions, fragile societies, and weak financial systems harder. Pandemics, global interest rate spikes, and energy crises impact currencies, refinancing costs, and capital flows in open, institutionally weak economies. Many countries rely on foreign capital and a stable dollar. If yields rise in developed countries, many investors become less inclined to put their money into the volatile emerging markets. They then withdraw funds from EM funds and ETFs, which can exacerbate crises. This is the downside of the often-popular carry trades.

5. “Many currencies = high diversification.”

The Polish zloty and the Mexican peso appear to have little in common, and a basket of currencies fluctuates less than a single one. However, diversification does not negate the influence of the dollar cycle. Many emerging market currencies react to the same mix of U.S. interest rates, global risk appetite, and liquidity. Under unfavorable conditions, many EM currencies come under pressure simultaneously. This is what happened in 2025, when currency losses eroded the generous coupons in many EM bond funds.

Investors, what should you do? The seemingly surprising answer: invest in emerging market bonds as well—local currencies, hard currencies, corporate bonds. For us at envestor, emerging market bonds have been an indispensable part of our mix of funds and ETFs for years. Many advisory portfolios hold a significant allocation to emerging market bonds. Actively managed short-duration funds also mitigate the high duration risks associated with ETFs. However, the picture is never black and white. Emerging market bonds are welcome risks for portfolios, but they are risks—often unknown ones—that must first be understood.