Emerging market debt offers high yield, diversification – proceed carefully
The search for yield – especially when markets are in turmoil – has investors digging into emerging market debt for new opportunities and to diversify their portfolios. Investors poured $152 billion into emerging market debt exchange-traded products in 2025, according to BlackRock and Markit. That compares to the $103 billion that flowed into emerging market equity exchange-traded products. “We’re shifting to high-quality emerging market bonds, countries that don’t have a lot of inflation risk right now,” said Tom Becker, a portfolio manager on the Global Tactical Asset Allocation team at BlackRock. “U.S. fixed income is only half of the global fixed income market, so there are a lot of other opportunities when you open up that international lens and particularly if you hedge your FX exposure,” he added. In a February report, Blackrock pointed to emerging market hard currency debt as a place where it is overweight. Higher yields in emerging market debt are helping lift fixed income returns. The Morningstar Emerging Markets Composite Bond index has a total return of nearly 9% in the past 12 months, compared to roughly 5.8% for the Morningstar U.S. Core Bond index . Still, investors should proceed carefully: Higher risks tend to accompany those attractive returns. Driving factors behind the gains Portfolio managers and analysts alike point to several factors driving interest in emerging market debt. First, there’s the weaker U.S. dollar. The U.S. dollar index has fallen about 7% in the past year. Many emerging market sovereign and corporate bonds are issued in U.S. dollars, so a weaker dollar can actually lower the cost of servicing that debt . Second, growth outside the U.S. is starting to catch up to the world’s biggest economy. “Now what we have is a much more balanced picture of growth globally,” said AllianceBernstein’s head of emerging markets debt Christian DiClementi. “The U.S. will grow this year, but the growth differential between the U.S. and other countries isn’t as wide as it was back then.” Finally, emerging market debt offers compelling yields compared to higher-quality fixed income assets – especially when many fixed income sectors in the U.S have become more expensive, according to Tony Miano, investment strategy analyst at Wells Fargo Investment Institute. Consider that the Vanguard Emerging Markets Government Bond ETF (VWOB) has a 30-day SEC yield of 5.58%, and the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) has a 30-day yield of 5.43%. These factors also underscore the additional risk investors take when they increase exposure to emerging markets. “Emerging markets can introduce currency risk, volatility and country-specific risk, which may not always align with the conservative fixed income or bond investor,” said Nick Srmag, senior portfolio manager at MAI Capital Management. He has taken a conservative approach to fixed income, looking at a strategic weighting of about 2.5% in emerging markets debt. “We still view emerging markets as something that can play a role in portfolios, but it’s important to be selective and disciplined on position sizing and mindful of the risk profile of that market,” Srmag added. Seeking opportunities BlackRock’s Becker called out China, Korea and India as some of the countries that have captured the firm’s attention, highlighting “a number of Asian emerging markets where inflation is less of a risk and fiscal risk isn’t as high.” AllianceBernstein’s DiClementi, who is also a portfolio manager on the AB Emerging Markets Multi-Asset Portfolio (ABYEX) and the AB High Income Fund (AGDYX) , pointed to a “new kind of emerging market in Asia” where companies could be “net beneficiaries” of increasing competition between the U.S. and China over dominance in artificial intelligence. Korea is “a country that is top of mind when we think about those new emerging markets,” he said. DiClementi also likes Latin America, with Peru, Colombia and Brazil facing key elections. “It’s interesting from a political perspective,” he said. “Countries are skewing right, and that is good because the more right-leaning parties tend to be more macroeconomically orthodox.” “I think as these countries skew right, it raises the possibility that they can make deals with the Trump administration,” he said. Hopping in Investors hoping to boost returns and income through emerging markets debt should speak with their financial advisor and make sure their exposure reflects their risk appetite and goals. Phil Blancato, chief market strategist at Osaic, noted that while his firm has emerging markets debt exposure in two of its high-income portfolios, there’s no exposure to that sector in its 60/40 portfolio. “I don’t think it belongs in a 60/40 portfolio,” he said, noting that there are still attractive yield opportunities in the U.S. “When the 10-year [Treasury yield] goes to 3.75%, 3.5%, then that is the opportunity to go offshore.” Late Tuesday, the 10-year Treasury was yielding 4.06%. — CNBC’s Michael Bloom contributed reporting.
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