Attention EMBI Shoppers

Emerging markets debt delivered strong returns in 2025, but today’s tight spreads and muted volatility suggest investors are being paid very little to take on benchmark risk. Dollar-denominated EM debt now offers a spread over Treasuries that is not only well below its long-term average, but also sits near the tightest levels seen since before the global financial crisis once defaulted bonds are properly excluded.

History indicates that from these starting points, forward returns tend to be skewed to the downside, with a high probability of spread widening that can quickly erase current carry. This leaves benchmark-constrained investors holding a mix of richly valued bonds, defaulted credits and meaningful US duration exposure at uncompelling compensation levels.

In this late-cycle environment, patience and flexible strategies that can selectively allocate across countries and issuers may offer a better balance of risk and opportunity than strict adherence to EM benchmarks.