The Quiet Outperformer: Why EM Bonds Deserve a Second Look
June 25, 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, we believe that is changing. Ongoing tariff drama has served as a catalyst, but the long-term drivers of this shift are not new, and we believe are 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.
EM Bonds Have Outperformed Global and U.S. Markets Over the Last Decade
Source: Morningstar as of 5/31/2025. 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. 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.
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 see a strong 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). Many investors are underinvested in EM bonds, and we believe now is 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 we believe outperformance can continue.
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VanEck offers active and passive investment solutions for investors to access the benefits of emerging markets bonds in their income portfolios:
The VanEck Emerging Markets Bond Fund was one of the first blended emerging markets bond strategies in the market. The Fund is actively managed with the flexibility to invest in sovereign and corporate debt in hard and local-currency. The Fund’s broad universe and bottom-up, high active share approach drives the opportunity to potentially outperform the benchmark over a market cycle.
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.
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.
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DISCLOSURES
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.
J.P. Morgan EMBI Global Diversified Index: is comprised of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by emerging markets sovereign and quasi-sovereign entities. The index weighting methodology limits the weight of countries with larger debt stocks.
J.P. Morgan GBI-EM Global Diversified Index: tracks local currency denominated EM government debt. The index weighting methodology limits the weight of countries with larger debt stocks.
ICE BofA Global Broad Market Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
J.P. Morgan GBI-EM Global Core Index, is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.
VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) is not sponsored, endorsed, sold or promoted by J.P. Morgan and J.P. Morgan makes no representation regarding the advisability of investing in EMLC. J.P. Morgan does not warrant the completeness or accuracy of the J.P. Morgan GBI-EM Global Core Index. "J.P. Morgan" is a registered service mark of JPMorgan Chase & Co. © 2018. JPMorgan Chase & Co. All rights reserved.
The principal risks of investing in VanEck ETFs and mutual funds include, but are not limited to, sector, market, economic, political, foreign currency, world event, index tracking, active management, social media analytics, derivatives, blockchain, commodities and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. VanEck ETFs may also be subject to authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares risks. VanEck ETFs or mutual funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs or mutual funds that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs or mutual funds that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.
© 2025 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.
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DISCLOSURES
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.
J.P. Morgan EMBI Global Diversified Index: is comprised of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by emerging markets sovereign and quasi-sovereign entities. The index weighting methodology limits the weight of countries with larger debt stocks.
J.P. Morgan GBI-EM Global Diversified Index: tracks local currency denominated EM government debt. The index weighting methodology limits the weight of countries with larger debt stocks.
ICE BofA Global Broad Market Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
J.P. Morgan GBI-EM Global Core Index, is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.
VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) is not sponsored, endorsed, sold or promoted by J.P. Morgan and J.P. Morgan makes no representation regarding the advisability of investing in EMLC. J.P. Morgan does not warrant the completeness or accuracy of the J.P. Morgan GBI-EM Global Core Index. "J.P. Morgan" is a registered service mark of JPMorgan Chase & Co. © 2018. JPMorgan Chase & Co. All rights reserved.
The principal risks of investing in VanEck ETFs and mutual funds include, but are not limited to, sector, market, economic, political, foreign currency, world event, index tracking, active management, social media analytics, derivatives, blockchain, commodities and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. VanEck ETFs may also be subject to authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares risks. VanEck ETFs or mutual funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs or mutual funds that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs or mutual funds that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.
© 2025 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.