EM High Yield Corporates: Superior Yields, Low Defaults

Key Takeaways

• Strong Momentum: EM high yield corporates have extended their outperformance in 2025, supported by improving fundamentals.
• Compelling Yields: The segment provides one of the most appealing income opportunities in fixed income, offering strong carry and attractive compensation for risk.
• Attractive Risk Profile: Despite perceptions, EM high yield issuers now exhibit higher average credit quality, lower defaults, and lower leverage than US peers.

Emerging market high yield corporate bonds continued their momentum in 2025, outpacing US and major global credit benchmarks after a robust gain of approximately 13% in 2024. Over the past 15 years, this EM debt segment has more than doubled in size, evolving into a broader and deeper market. Today, the asset class benefits from improving fundamentals, higher credit quality and lower default rates than US high yield, while offering a substantial yield cushion.

Mind the Yield

EM high yield corporates continue to offer some of the most attractive yields in the fixed income space. The income portion of the return has been the dominant driver of performance, providing steady carry that cushions volatility and smooths drawdowns through market swings. This dynamic, where carry leads the way over larger price gains, can deliver consistent returns without relying on further spread tightening.

Source: Morningstar. Data as of October 2025. Please see below for indices that represent each category. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

Attractive Compensation for Risk

EM high yield corporate bonds are often perceived as riskier than those in the US and other developed markets, yet they exhibit higher credit quality, lower defaults and superior compensation for risk. The EM high yield index tilts more toward higher quality, with approximately 62% rated BB versus 55% in US high yield. Default rates spiked post‐COVID in 2022‐2023 following China’s property sector collapse and Russian sanctions but have since normalized to levels below US high yield. Further, EM high yield corporate issuers often display wider spreads and lower leverage than US high yield, offering a relatively more favorable risk/reward profile.

Lower Leverage than US HY

Source: Bank of America. Data as of December 2024.

The EM high yield corporate debt market has matured into a larger, more diversified market that presents an attractive opportunity for income investors: higher yields and improved credit quality relative to US high yield.