The global fixed income market has been transformed by the rapid rise of emerging market debt (EMD), particularly hard currency (HC) bonds. These assets, which originated in the early 1990s following the restructuring of defaulted sovereign bank loans into tradable hard currency (U.S. dollar) bonds, have evolved into a multi-trillion-dollar liquid and versatile allocation for institutional investors. Today, EMD HC offers access to the world’s fastest-growing economies, higher yields, and broad diversification, making it an increasingly strategic holding for global fixed income portfolios.

This impressive growth has been underpinned by the economic rise of emerging markets (EM) over the last 30 years. These economies now account for about 40% of global GDP and nearly 60% of global growth, with forecasts showing EMs growing at 4.2% versus 1.5% for advanced economies in 2025. The JP EMBI Global Diversified bond index now includes close to 70 countries, up from just a handful in the 1990s, reflecting the breadth and diversity of the asset class.

This broad opportunity set, combined with its flexible duration profile and robust credit quality, makes EMD particularly attractive to insurance, pension plan and other institutional investors, allowing them to tailor exposures to meet both regulatory and strategic objectives. These qualities, coupled with its low correlation with developed market (DM) assets, strong yield enhancement, and growing ESG alignment, make EMD HC a Swiss Army Knife for portfolio construction—whether the goal is to manage risk, enhance returns, and/or achieve long-term sustainability.

Resilience, returns, and fundamentals

Emerging economies have demonstrated remarkable resilience to external shocks over the years, driven by both improved domestic policy frameworks and favorable external conditions. Catalysts include credible monetary and fiscal policies, more independent central banks, and deeper local currency debt markets. While this resilience is a positive sign, a clear understanding of the underlying economies that make up the EMD asset class is essential: The International Monetary Fund (IMF) cautions that progress is uneven across countries and that continued reforms are necessary to maintain and build on these gains, especially given elevated debt levels and the potential for deteriorating external conditions.

That said, many EM central banks now operate with greater independence from fiscal pressures, leading to better-anchored inflation expectations, and fiscal policies have become more countercyclical, providing a buffer during economic downturns. Consequently, EMs with strong policy frameworks have experienced smaller output contractions and lower inflation surges during risk-off episodes compared to past cycles.

Relative value and performance

2025 has been a strong year for EMD HC investors. The asset class has, to date, delivered superior returns as index-level spreads tightened and credit rating momentum favored upgrades over downgrades. Although EMD HC typically provides higher yields and spreads for similar or slightly higher volatility when compared to developed market (DM) investment grade (IG) and global high yield (HY) bonds, its strong performance at a time of heightened volatility around U.S. trade policy  and broader geopolitical considerations underscores its resilience and tactical value.

The risk profile of EMD HC is nuanced. While emerging markets can exhibit higher volatility than developed markets, the asset class has proven resilient, particularly during periods of acute market pressure and geopolitical stress. Sovereign credit ratings have trended upwards, with October marking an extension of the solid positive over negative credit rating trajectory. The three-month moving average of positive to negative credit rating actions set to new highs for the year, and the net cumulative actions stands at the least negative since COVID-19.

Subsequently, projected EM sovereign high-yield default rate for 2025 is projected to be stable at very low single digits propelled  by overall sound economic growth, disinflationary dynamics and relatively sound fiscal and external balances. This broad investable universe allows investors to adjust risk, duration, and currency exposure to match specific portfolio objectives.

Furthermore, EMD  technicals offer a further tailwind with strong net inflows and record high net issuance that offer a supportive backdrop.

Regulatory capital and portfolio construction

The balanced maturity structure of EMD HC supports both short-term tactical allocations and long-term strategic holdings. This flexibility makes it applicable to various institutional schemes.

• Hard currency sovereign debt: Average maturity of 7–10 years

• Hard currency corporate debt: IG maturities up to 10+ years, HY maturities of 3–5 years

• Local currency debt: Typical maturities of 3–7 years

This maturity profile enables duration matching for defined benefit (DB) schemes and facilitates return-seeking tilts for defined contribution (DC) accumulation phases. For pension funds, EMD HC can act as a return enhancer and diversifier, often with a 2-5% weight in DC strategies during accumulation. In the decumulation phase, it can serve as a yield enhancer, with a typical allocation of around 2% focused on IG hard currency debt.

Efficient portfolio modeling, including efficient frontier analysis, consistently demonstrates that incorporating EMD HC into a multi-asset portfolio can enhance expected returns for a given level of risk.

Investment styles and sustainability considerations

EMD HC accommodates multiple investment styles. A “buy and maintain” strategy focuses on stable income and duration matching, favoring IG hard-currency debt. In contrast, a total return approach employs active management to exploit idiosyncratic opportunities, tactical allocations to HY, and selective local currency exposure. Model portfolios can be tailored to meet scheme objectives, risk budgets, and regulatory requirements.

Thematic and sustainability-linked bonds and instruments are also increasingly prevalent in EMD, broadening the opportunity set and attracting dedicated capital. As EMs implement stronger governance, rising stars are emerging among both corporate and sovereign entities. This trend necessitates rigorous, issuer-specific due diligence focused on sustainability metrics, policy frameworks, and transparency.

The growth of EMD reflects stronger financial infrastructure and improved access to global capital. While deeper markets provide better access, they can also introduce new vulnerabilities. Elevated debt burdens in some EMs, a consequence of post-COVID borrowing and tighter global financial conditions, underscore the importance of credit differentiation and active management. Transparency is another critical factor. The existence of opaque bilateral lending, particularly from nontraditional creditors, highlights the need for forensic analysis in specific markets to fully understand an issuer’s debt profile.

An evolving asset class

EMD hard currency has established itself as a strategic allocation within the global fixed income universe. Its evolution from a niche segment to a core asset class reflects the growing economic weight and policy maturity of emerging markets. With improving fundamentals, resilient credit quality, and an expanding opportunity set that also includes sustainability-linked instruments, EMD HC is well-positioned to potentially enhance both return and diversification in institutional portfolios. Rigorous due diligence and active management are paramount to capturing the full potential of this dynamic asset class.