Bond Watch: a standout performer so far in 2025

The first three quarters of 2025 saw steepening bond yield curves, aggressive tariff announcements (with US President Donald Trump threatening resurgence in Q4), areas of sticky inflation and a weaker dollar.

Against a backdrop of both challenges and tailwinds, bond market returns have been mixed.

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Looking at the performance of bond sectors year to date, a standout performer is emerging market debt. For example, the GBP Hedged Bloomberg Emerging Market Hard Currency Aggregate Index returned over 8% year-to-date, convincingly surpassing returns of Global or US Treasury indices.

What is emerging market debt?

Emerging market debt (EMD) refers to bonds of issuers within emerging economies. Hard currency means debt is issued in “stable” currencies (e.g. the US dollar or the euro), while “local currency debt” is issued in a country’s domestic currency.

Typically, hard-currency issuance is more prolific across the Middle East and North Africa and Latin America, while local currency indices typically bias more towards Asia.

EMD has seen rapid growth in issuance over the past decade and forms a growing portion of global bond indices (currently near 15%). Depending on the index, more than half of EMD issuance is rated investment grade (the highest-quality rating), meaning EMD is not necessarily of low quality.

While recent returns have been strong, at times in the past EMD has been out of focus due to returns that sometimes didn’t seem to justify a higher perceived risk over more conventional bonds.

What’s driving performance?

The recent past has provided some supportive macro factors for EMD. Throughout 2025, there has been a softening of the US dollar. This typically eases fiscal pressure on emerging market economies. Since late 2024, the Federal Reserve has cautiously been cutting rates, which can induce investors to look beyond US-issued debt for yield.

Increasing commodity prices are often to the benefit of export-led economies (many are found outside developed regions), while a continuation of China’s stimulus and growing intra-regional trade in Asia has improved sentiment towards the region.

Looking ahead, there have been indications of a potential shift away from US-centrism that could benefit emerging market assets. Credit downgrades to the US and moderating growth expectations across developed market have made debt from emerging markets look more attractive.

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However, as a general rule, attempting to forecast the next moves for the US dollar and how this affects asset classes is difficult.

Furthermore, spreads of EMD above US Treasuries are narrower than years gone by, meaning yields don’t offer significantly more reward versus safer US government bonds. That leaves EMD susceptible to repricing risk if a re-widening of spreads occurs which would be negative for near-term returns.

In all, EMD is a diversifying but risky area that likely only more adventurous investors will invest in directly. Trying to make a tactical allocation based on macro views is very hard to get right.  

If allocating directly, a capable actively managed approach may be preferable to passive exposure. However, given its increased prominence both in global bond indices and more broadly (such as with Argentina’s BONTE issuance this year), it’s a sector worth being cognisant of going forwards.

One option is the PIMCO GIS Emerging Markets Bond fund. It focuses on hard-currency sovereign bonds issued within emerging economies.

The experienced team draw on on Pimco’s strong macroeconomic capabilities as well as its substantial analyst resource in what is both a top-down and bottom-up research process.