The most optimistic moment in 13 years! The risk premium of emerging market bonds relative to US Treasuries hits a low

Global bond investors’ confidence in emerging markets has reached its highest level in 13 years. The risk premium on emerging market sovereign US dollar bonds relative to US Treasuries has fallen to around 2.5 percentage points, the lowest since January 2013.

According to JPMorgan’s risk premium indicator, the current spread has narrowed by nearly 5 percentage points compared to five years ago. This change reflects investors flocking to the emerging market sovereign bond market amid debt restructuring, IMF-supported fiscal reforms, and improvements in external balances.

Improvements in emerging market fundamentals are attracting sustained capital inflows. Currently, developing economies are on average running current account surpluses, while developed countries are running deficits. It is expected that last year and this year, the economic growth rate of developing countries will outpace that of developed economies by at least 2.4 percentage points.

Resonance of Fundamentals and Technicals

Anders Faergemann, head of emerging market sovereign bonds at PineBridge London, said:

“The fundamentals in emerging markets are generally strong, and we believe technical factors are supportive for risk, thereby offsetting historically narrow spreads. This is why we maintain a positive stance on the asset class.”

The Bloomberg Emerging Markets Sovereign Total Return Index began rising at the start of 2026, delivering investors a return of more than 13% last year. As more investors seek to diversify US market risk, expectations for Fed rate cuts and ample global liquidity together continue to support sustained inflows into this sector.

William Blair fund manager Luis Olguin noted:

“We are currently in a just-right situation, with robust fundamentals, expectations for a soft economic landing and prospects for Fed rate cuts continuing to attract funds into emerging market bonds. Although spreads have narrowed significantly, if the Fed proceeds with rate cuts and yields decline, emerging market assets may still gain capital appreciation in the long run.”

Default Risk Premium Hits New Lows

As bond yields rise rapidly, traders have reduced credit default swap premiums used to hedge against emerging market debt default risks. S&P Global Markit’s emerging market CDS premium dropped to 124 basis points at the beginning of this year, the lowest in eight years.

The decline in this indicator reflects the market’s significantly reduced concerns over emerging market sovereign defaults. Strengthened investor confidence and improved macro fundamentals are forming a virtuous cycle, further enhancing the overall appeal of emerging market bonds.

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