December 22, 2025 | Emerging Markets Debt
Head of the Emerging Markets Debt Team, Portfolio Manager
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Emerging markets (EM) debt has matured. What was once viewed as a volatile tactical trade is now a structurally stronger, institutionalized asset class. The asset base has expanded, policy discipline has improved, and reforms have strengthened the foundation beneath both sovereign and corporate issuers. Yet the market still suffers from legacy perceptions—ones increasingly out of step with today’s reality. Despite compelling fundamentals and attractive risk-adjusted return potential, EM debt remains under-owned and underrepresented in global portfolios. Here’s what has changed.
The tradable debt stock in EMs has grown at 13% per year, from $2 trillion in 2000 to about $44 trillion[1]by the end of 2024. The asset class is no longer defined by a handful of distressed sovereigns; it encompasses a broad spectrum of investment-grade and high-yield credits, quasi-sovereigns, and corporates across more than 900 issuers in more than 80 countries.
The transformation began with central banks. When inflation surged globally in 2021-2022, many emerging economies were first to respond—and among the most effective. Policymakers from Brazil to the Czech Republic to Indonesia tightened early and aggressively, preserving currency stability and anchoring inflation expectations well before their developed-market counterparts even moved.
EMs appears to be reaping the rewards of having done the hard work early.
Now, those same economies are entering an easing cycle with headroom and credibility, offering investors both carry and capital appreciation potential. In other words, EMs appears to be reaping the rewards of having done the hard work early. That shift marks a profound change in the risk calculus for investors who once viewed EMD as a leveraged bet on the dollar or global liquidity.
Frontier markets continue to evolve. In the past four years, harsh global macroeconomic conditions and policy measures supported by the International Monetary Fund (IMF) have led many countries to move away from unsustainable currency pegs and managed exchange rates. We believe this shift has resulted in more competitively valued currencies, as seen in Nigeria and Egypt. At the same time, tighter monetary policy and sharp interest rate hikes have strengthened the investment case for frontier markets debt.
Frontier markets offer strong diversification potential, as they not only tend to be uncorrelated with other risk asset classes, but also with each other. Even within the same country, hard and local currency bonds often behave differently. Because these markets are less researched and underrepresented in global benchmarks, active managers can capitalize on inefficiencies to deliver attractive risk-adjusted returns while managing idiosyncratic risks.
Local currency markets are a dynamic part of the EM debt universe, and investors are noticing. Falling global yields and improving current accounts have boosted returns, while active positioning in local markets and currency management have added significant alpha potential. Many active managers who leaned into high-real-yield markets, such as Mexico and the Philippines, have benefited from appreciating local currencies and disinflation-led bond rallies.
The EM debt opportunity is now driven more by idiosyncratic reform and relative value than by simple exposure to risk sentiment.
Crucially, we believe these gains have come not from indiscriminate risk-taking, but from granular country-level judgment. That reflects a structural evolution in EM debt as a whole: the opportunity is now driven more by idiosyncratic reform and relative value than by simple exposure to risk sentiment.
As the U.S. Federal Reserve edges toward rate cuts and global liquidity normalizes, we believe EM debt stands to remain a core component of global fixed-income portfolios. Indeed, allocations could rise as investors track the strong performance potential and seek to diversify their allocations in fixed income. Real yields have remained compelling, and currency valuations offer a cushion against volatility.
This is not a beta trade.
Importantly, this is not a beta trade. With greater differentiation across sovereigns, our outlook favors disciplined, research-led active management—investors willing to back credible policy frameworks and reform momentum, rather than chase yield alone.
Our view on EM debt is that it has, in short, grown up. It has matured into a sizable, diversified, and resilient asset class, offering constructive fundamentals, attractive yields, and strong bilaterial and multilateral support. No longer just an opportunistic allocation, EM debt has the potential to meaningfully enhance portfolio diversification and boost overall yields without a proportional increase in risk.
We believe this advantage stems from the gap between perceived and actual risks in EMs, creating opportunities for higher returns relative to other asset classes. In essence, integrating EM debt can potentially deliver volatility levels comparable to developed markets while providing an alternative source of income.
Marcelo Assalin, CFA, partner, is the head of William Blair’s emerging markets debt team, on which he also serves as a portfolio manager.
[1]Source: Bank of America EMD Primer, 2025 Edition. EM domestic debt has grown to $39 trillion while external debt reached $5 trillion.
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