Emerging market (EM) corporate bonds have faced considerable challenges in recent years, with rising geopolitical tensions, defaults in China’s real estate sector, and elevated global interest rates dampening investor appetite; however, the tide may be turning. A shift in the global interest rate environment – marked by a rate cut by the US Federal Reserve and a fresh economic stimulus package in China – offers an opportunity to revisit this often-overlooked asset class.
The underlying fundamentals of EM corporate issuers remain robust. Companies in the sector continue to exhibit low leverage and historically low default rates, providing a strong foundation despite broader uncertainties around global trade and economic growth.
This asset class has grown substantially over the past decade: from USD 0.6 trillion in 2008 to USD 2.5 trillion today, EM corporate bonds now surpass the US high-yield market in size. Most bonds in this space are investment-grade, yet lingering misconceptions about credit risks and liquidity – particularly in comparison with EM sovereign bonds – persist.
Examples from Argentina and Turkey illustrate the resilience of corporate issuers even under sovereign financial stress, highlighting the importance of granular, bottom-up analysis when identifying opportunities.
While further spread tightening may be limited, EM bond spreads are expected to remain steady. This stability shifts the focus of returns towards carry and interest rate movements rather than price gains. In this environment, EM corporate bonds present a compelling opportunity, offering a significant yield premium over US investment-grade bonds, supported by improving market conditions and strong issuer fundamentals.
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