Where we see opportunity in emerging markets debt in 2026 Where we see opportunity in emerging markets debt in 2026 http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\mountain-peru-rainbow-small.jpg December 2 2025 December 2 2025

Where we see opportunity in emerging markets debt in 2026

Federated Hermes 2026 outlook series.
Published December 2 2025
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Despite the economic and geopolitical challenges of 2025, emerging market (EM) fixed income has performed strongly. Year-to-date as of Nov. 5, hard currency EM sovereign bonds have returned over 12%, while EM local bonds have delivered an impressive 15% based on J.P. Morgan Emerging Markets Bond Indexes. These returns have been well-balanced between capital appreciation and a steady, high-income stream.

Looking ahead to 2026, we remain constructive on EM debt. While valuations are rich on a spread basis, we believe EM fundamentals remain robust. We anticipate further easing by the US Federal Reserve, and the high yields available in the asset class should support continued positive returns.

Where we see potential 

We favor two key groups of EM countries. The first are "Selective Frontier" Markets. These are next-generation, low-income countries progressing toward mainstream EM status. We see strong potential in Nigeria, Sri Lanka and Ecuador. Additionally, recent developments in Argentina are encouraging and may help solidify President Milei’s reform agenda.

A second group we like are the countries aligning more closely with developed market peers that are supported by orthodox macroeconomic policies that have anchored spreads. Here, mid-beta names include Turkey, South Africa and Brazil. 

Thinking locally

A major theme in 2025 has been the weakness of the US dollar, which is down over 8.3% year-to-date as of December 1. It remains one of the few asset classes that has not recovered post-Liberation Day, presenting a compelling opportunity for EM investors.

Historically, EM local bonds have suffered due to dollar strength. However, we believe a paradigm shift is underway. Local-currency bonds offer potential foreign currency gains from appreciating EM currencies and high real interest rates. We believe exposure here could be a significant source of alpha in 2026.

Tags 2026 Outlook . Fixed Income . International/Global . Markets/Economy .
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Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.  In addition, fixed income investors should be aware of other risks such as credit risk, inflation risk, call risk and liquidity risk.

Alpha measures the excess returns of a portfolio relative to the return of a benchmark index.

Beta: A measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole.

The spread is the difference between the yield of a security versus the yield of a United States Treasury security with a comparable average life.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Prices of emerging market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

J.P. Morgan Emerging Markets Bond Index Global: An unmanaged index tracking total returns for external currency denominated debt instruments of emerging markets: Brady bonds, loans, Eurobonds and local currency instruments. Indexes are unmanaged and investments cannot be made in an index.

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