Rising debt, tight spreads boost EMD’s appeal

Binaya Dahal

Journalist

11 December 2025

Investors are increasingly eyeing the emerging markets debt (EMD) sector to diversify their portfolio as concern over rising government debts and tight corporate spreads mount in developed markets, new research suggests. 

The Lonsec Research and Ratings study found EMD’s characteristics, including predominantly investment-grade securities and higher yields, have prompted investors to look beyond traditional fixed income strategies.

Although developed markets hold more than US$50 trillion in outstanding debt compared to EMD, the World Bank’s estimation of emerging economies accounting for roughly 45% of global GDP on a nominal basis and more than 60% on PPP basis implies EMD to have better ground for debt sustainability.

Senior Investment Analyst at Lonsec Research and Ratings, Mike Grdosic said the case for local EMD has become stronger.

“This is particularly relevant today, given rising levels of developed market government debt and potential ‘currency debasement’ risks,” Grdosic said.

“Moreover, developed market non-government marginal yields, e.g. corporate spreads, are also historically tight, making traditional ‘income’ securities appear less attractive.”

The yields on EMD vary by country but around 80% of securities in the JP Morgan GBI-EM Global Diversified index are rated investment-grade (BBB or above).

Grdosic said debt managers would be better off allocating huge sums in the EMD sector with a dedicated exposure to a specialist manager.

“This is due to the ability to control the EMD exposure size at the portfolio level and utilise specialist skills that can harness the idiosyncratic opportunities,” he said.

“Further, changing fundamentals between developed and emerging economies imply shifting relationships to risks, where local EMD may be more diversifying on a forward-looking basis.”

Lonsec said its coverage of active EMD managers remains tightly focused with each one offering a distinct approach, from benchmark-aware sovereign strategies to Asian corporate-focused funds.