May 18, 2026 | Emerging Markets Debt
Portfolio Manager
Portfolio Manager
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Despite heightened volatility from the ongoing conflict in the Middle East, frontier emerging markets debt showed its quiet strength in the first quarter.
Hard currency frontier debt[1] declined modestly by 0.75%, with performance driven largely by spread widening and marked regional divergence—Latin America generated positive returns, while Africa, Asia, Europe, and the Middle East lagged. In contrast, local currency frontier debt[2] delivered stronger results, supported by carry and more stable domestic dynamics.
We continue to view the frontier opportunity set as compelling. Resilient fundamentals, high real yields, and ongoing adjustments in FX and local rate curves are reinforcing a shift toward returns driven more by carry and country-specific factors than broad beta.
Following significant easing in 2025, the scope for further rate cuts is now more selective. Markets such as Egypt, Ghana, Zambia, and Kenya retain room for adjustment as inflation moderates and external balances improve, while Nigeria is likely to ease more gradually and in a data-dependent manner.
Elsewhere, strong carry, improving fiscal and external dynamics, and differentiated country stories—particularly among commodity exporters—should continue to support demand. Although spreads are tighter and positioning more concentrated, we believe the overall risk/reward profile remains constructive, with frontier debt offering a meaningful yield and diversification premium relative to both mainstream EM and developed market sovereigns.
Below, we show our top exposures, followed by some highlights of our thinking.
Source: William Blair, as of March 2026. Overweights/underweights may vary between vehicles.
Our top hard-currency exposures are Suriname, Mongolia, and Angola.
Suriname: We believe our position offers a relatively defensive frontier exposure, given Suriname’s position as an emerging energy exporter with improving fiscal discipline and declining debt metrics. We expect future oil revenues to provide downside protection and help insulate the credit during global risk-off periods.
Mongolia: We see our position as defensive given that Mongolia is a commodity and energy exporter. External buffers and export revenues linked to coal and energy provide resilience relative to import-dependent peers, even as macro volatility intermittently pressures spreads.
Angola: Our overweight (through a short-dated, amortizing hard currency bond) reflects authorities’ continued commitment to fiscal discipline, conservative oil-price assumptions in the 2026 budget, and a strong track record of budget surpluses and external debt service.
Our top local-currency exposures are Nigeria, Uruguay, and Serbia.
Nigeria: The country has experienced a sharp moderation in inflation following statistical rebasing and disinflation momentum. It also has an evolving policy mix that is shifting away from outright tightening, improved foreign exchange (FX) market functioning (which has helped stabilize the naira), and stronger external buffers. These developments underpin high carry, scope for gradual yield compression, and currency stability.
Uruguay: Inflation anchored near the lower bound of the central bank’s target range allows a front-loaded but measured easing cycle that supports bond valuations, a broadly stable peso despite modest policy accommodation, and continued fiscal prudence under a multiyear budget framework. At the same time, we believe the sovereign’s investment-grade status and strong policy credibility underpin the sustainability of carry-driven returns.
Serbia: Our position is supported by in-target inflation, a cautious and credibility-focused central bank maintaining positive real rates, stable growth supported by European Union and international financial institution funding, and relatively light foreign positioning. We believe this provides a defensive carry profile amid heightened regional and global uncertainty.
Our top total exposures are Egypt, Sri Lanka, and Paraguay.
Egypt: We maintained our position following the recent FX and rates adjustment, as the repricing has restored attractive levels, with elevated Treasury bill carry meaningfully compensating for FX volatility. Offshore positioning has largely normalized, while we believe improved policy credibility and anchored local yields continue to support carry-driven returns despite near-term currency risks.
Sri Lanka: Our aggregate exposure spans both local and hard currency. In local markets, improving fundamentals under the International Monetary Fund program—reflected in low, contained inflation, credible yet accommodative policy, and recovering external inflows—are reinforced by attractive valuations and high real carry. In hard currency, our position in the short-dated, amortizing 2028 Eurobond provides a lower-duration profile, benefiting from near-term cash flows while helping to manage risk in a still-volatile global environment.
Paraguay: Our predominantly local currency position is supported by strong macro fundamentals and credible policy. Inflation remains anchored within the central bank’s target, fiscal management is consistent with investment-grade metrics, and external buffers are robust. In our view, real yields remain attractive and FX valuations favorable, while relatively low foreign positioning and orderly market dynamics at quarter-end further support the appeal of high-carry Paraguayan guaraní assets on a risk-adjusted basis.
Yvette Babb is a portfolio manager on William Blair’s emerging markets debt team.
Daniel Wood is a portfolio manager on William Blair’s emerging markets debt team.
[1] The NEXGEM Index tracks the performance of U.S. dollar-denominated sovereign bonds issued by frontier EM countries. [2] The FTSE Frontier Emerging Markets Index measures the performance of frontier EM countries.
Indices are unmanaged and do not incur fees or expenses. A direct investment in an unmanaged index is not possible.
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