Polina Kurdyavko, Managing Director, Senior Portfolio Manager & Head of Emerging Markets, BlueBay Fixed Income, RBC Global Asset Management (UK) Limited, summarizes the market in 2025 for the asset class, and gives her thoughts for 2026.
2025 delivered strong emerging market fixed income returns, with hard currency sovereign debt yielding mid-teens and local currency sovereign debt delivering high-teens returns, driven by both rates and FX components.
Local currency debt (90% of EM issuance, comparable in size to the U.S. Treasury market) offers high real yields and attractive valuations, supporting debt sustainability and investor opportunities in 2026.
Geopolitical alliances are likely to continue to play out, Latin America for example benefits from U.S. strategic support under the Trump administration, with potential market-friendly leadership shifts in 2026 elections amplifying positive momentum.
Default rates are expected to remain below 1%, while corporate defaults stay in mid-single digits, underpinned by low EM debt leverage, improving fiscal deficits, and rising ESG-linked issuance.
Emerging markets offer diversified, low-correlation alpha sources in 2026, encouraging investors to adopt targeted strategies rather than broad asset-class allocations.
Watch time: 5.10
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Polina Kurdyavko, CFA
Managing Director, Senior Portfolio Manager & Head of Emerging Markets, BlueBay Fixed Income, RBC Global Asset Management (UK) Limited
How would you summarize 2025 in Emerging Market Debt?
Polina Kurdyavko: 2025 has been a strong year for emerging market fixed income. We have seen hard currency sovereign debt delivering mid-teen returns, and local currency sovereign debt being amongst the best performers within the asset class, delivering high teens in terms of return. Both coming from rates component and FX component. This strong performance has been supported by three underlying themes that we continue to see playing out next year. Monetary policy orthodoxy, geopolitical support for select countries or regions, and last, but not least, the fundamental strength of emerging market economies.
What is your outlook for Emerging Market Debt in 2026?
Polina Kurdyavko: Let me share with you what do we expect from these themes in 2026. Monetary policy orthodoxy remains the key factor underpinning debt sustainability in emerging markets. Over 90% of all debt in emerging market fixed income is issued in local currency. In fact, local currency market is equivalent to the size of the U.S. Treasury market. That, on one hand, reduces vulnerability in emerging market hard currency issuance.
On the other hand, provides interesting opportunities for investors to generate attractive total returns by accessing local currency markets, which today not only offer highest real yields, i.e., the differential between EM rates and U.S. rates over the last decade, but also have attractive FX valuation levels, which on a three-decade view is still very much at the bottom of the trading range, vis-à-vis the dollar.
The second factor is geopolitical alliances. We've seen big shifts in emerging market geopolitical stance through the course of this year, which we are likely to continue playing out next year. In particular, the main region that benefited from the new U.S. administration is Latin America, where Donald Trump views this region as strategic and wants to do whatever it takes to support its own backyard, so to say, through economic and political assistance. Especially when it comes to the countries that have aligned presidents with Donald Trump thinking.
Knowing that we have elections in countries like Colombia and Brazil next year, we could see further positive momentum as their leadership changes to a more market friendly one. Last but not least, is the expectation of default outlook. Broadly speaking, we expect low defaults in emerging markets, in particular in the sovereign space, we would expect default rates to be sub 1%, while in the corporate space, we would expect defaults to be in the mid single digits. We think fundamentally, emerging market continues to benefit from two main factors.
Firstly, relatively low debt leverage, vis-à-vis GDP, compared to developed economies. And secondly, quite low fiscal deficit on a relative basis. Moreover, we expect fiscal deficit to contract, generically speaking, in emerging markets over the next three to four years. Last but not least, some countries, in particular in frontier economies, still require support, and we think debt sustainability in certain countries could be challenged. But these are the areas where we see as alpha opportunities. We also expect these type of issues to drive more ESG-linked issuance, as investors are paying a lot more attention to transparency and the use of proceeds.
Overall, we believe 2026 will be a very interesting year, where emerging markets can be used as a source of alpha, with relatively low correlation between each other. Therefore, we encourage investors to look at different emerging market strategies to address particular concern in their portfolio, rather than looking at the asset class as an asset class they want to invest, or don't want to invest in. Ultimately, we have the full breadth of solutions for investors using emerging markets sources of alpha, both in relative return and absolute return.
Video recorded on November 21, 2025