As we have noted, sentiment has warmed. There are myriad ways to see this, but one ummm … emerged … in financial coverage this week that we think is worth highlighting. Emerging Markets (EM) bonds are generating heaps of praise after a strong 2025. Analysts see strong fund flows boosting returns as investors rotate away from the developed world with its trade deficits and slow growth and toward faster-growing EM with current account surpluses. While there are rational reasons for this good past performance, we think it is worth weighing where things stand before projecting them forward—and some risks for individual investors in forgetting fixed income’s primary portfolio role.
Bond markets have long had this quirk where people forget they, like stocks, move on supply and demand, with sentiment factoring prominently into demand. They also price in widely known information, including fund flows, economic growth rates, current account deficits or surpluses and all the rest. To the extent that any of these moved EM bonds over the past year (and we think the case is overstated and based largely on industry myths about how markets work), they are likely priced to a very great degree. Mind you, we aren’t saying this sets up EM bonds to start underperforming or falling tomorrow, but it is a point to keep in mind.
Here is another one: No bond category moves in a vacuum. Bond markets are diverse and global, just like stocks. There are EM and developed-world sovereign bonds. Investment-grade and junk. Corporate bonds—and within that, investment-grade and high-yield. EM bonds might not be special. They might just be participating in a broader fixed income bull market.