The Quiet Outperformer: Why EM Bonds Deserve a Second Look
18 July 2025
Read Time 4 MIN
The fundamental case for investing in emerging markets (EM) bonds has been building for some time, but investors have shown little interest in the asset class over the past several years. However, this might be changing. Ongoing tariff drama has served as a catalyst, but the long-term drivers of this shift are not new, and could be set to continue. Recent and longer-term returns reflect this. Emerging markets bonds have strongly outperformed U.S. and global aggregate bonds this year, as well as investment grade and high yield U.S. credit. Longer term, emerging markets bonds have been quietly outperforming the U.S. and global broad markets over the past decade, and in particular since 2022. Investors should remember that past performance is no guarantee of future results.
EM Bonds Have Outperformed Global and U.S. Markets Over the Last Decade
Source: Morningstar as of 31/05/2025. EM Bonds is represented by the 50% J.P. Morgan EMBI Global Diversified Index/50% J.P. Morgan GBI-EM Global Diversified Index; Global Broad Market is represented by the ICE BofA Global Broad Market Index; U.S. Broad Market is represented by the ICE BofA US Broad Market Index. Performance figures are shown in U.S. dollars (USD). Returns may increase or decrease as a result of currency fluctuations. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Key Risks
- Currency fluctuations can materially affect returns on emerging-market (EM) bonds, particularly when bonds are issued in local currencies.
- Sovereign and corporate issuers in EM countries face higher default and restructuring risk than developed-market issuers.
- Political instability, capital-control measures and lower market liquidity can increase price volatility and may delay or prevent exit.
- High-yield EM bonds carry elevated credit and downgrade risk; investors could lose some or all of their capital.
Performance Is Speaking Loudly
A key driver in this outperformance is the higher yield. As of May 31, 2025 EM bonds yielded 7.5%, a 2.8% increase over the broad U.S. bond market and more than 3% above the 10-year U.S. Treasury bond yield. In addition to these high nominal yields, real yields in emerging markets have been significantly higher than those in developed markets, favoring the case for local currency bonds in particular. Central banks have demonstrated a strong focus on keeping inflation under control, by hiking rates far before most developed markets and keeping real rates high. High real rates support emerging markets foreign exchange (EMFX) rates, providing central banks flexibility to ease rates if needed to support economic growth. Further, fundamental metrics, such as debt-to-GDP ratios, fiscal deficits, and current account balances compare favorably to developed markets.
Developed Markets: Growing Risk, Diminishing Reward
In addition to the long-term fundamental strength we see in emerging markets, we also see increasing risk in developed markets. Ongoing political dysfunction and the inability to address increasing debt levels means that investors may not be adequately compensated for the risk they are taking. These dynamics, as well as continued inflationary pressures, put pressure on developed markets rates, which could drive underperformance. The dollar’s ongoing role globally has started to be questioned, and recent behavior of U.S. rates and the U.S. dollar has not followed historical patterns. Heightened geopolitical risk may keep commodity prices high, stoking inflation and pushing yields higher in the U.S. while putting further pressure on the U.S. dollar – while benefiting emerging markets.
Why Now? Diversification and Dollar Dynamics
Altogether, we think there might be a good case for diversifying a U.S.-centric fixed income portfolio towards emerging markets bonds, given low to moderate correlation with other fixed income asset classes and strong negative correlation to the U.S. dollar (particularly local currency denominated bonds). With many investors being underinvested in EM bonds, it could be the time to consider higher exposure to the asset class. With risks growing in developed markets, stronger fundamentals in EM and more attractive EM bond yields, it is possible that the outperformance we observe continues. However, there is no guarantee that such returns will be achieved and investors may lose part or all of their investment.
VanEck Solutions
VanEck offers active and passive investment solutions for investors to access the benefits of emerging markets bonds in their income portfolios:
The VanEck J.P. Morgan EM Local Currency Bond ETF provides exposure to local currency bonds issued by emerging market sovereign issuers. It seeks to track the J.P. Morgan GBI-EM Global Core Index, part of the most widely followed local currency benchmarks globally due to the design around liquidity and investability. Key Risks: Foreign Currency Risk, Credit Risk, Risk of Investing in Emerging Markets Issuers.
For investors seeking the higher yields available through EM corporate bonds, the VanEck Emerging Markets High Yield Bond ETF provides exposure to non-sovereign EM issuers rated below investment grade. Key Risks: Liquidity Risks, Risk of Investing in Emerging Markets Issuers, High Yield Securities Risk.
Investment involves risks, including possible loss of capital. Investors should carefully read the Key Information Document (KID) and the Prospectus before making any investment decision, to gain a full understanding of the product's characteristics and associated risk factors, notably foreign currency risk, risk of investing in emerging market issuers and credit risk. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise, and investors may not get back the amount originally invested.
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Sources, unless stated otherwise: Bloomberg Data, June 2025.
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This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
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