Investors drive emerging market yields to lowest spreads versus developed nations since 2007

In a remarkable shift not seen since before the global financial crisis, investors have driven borrowing costs in emerging markets down to near their lowest levels relative to developed markets since 2007. This development signals renewed confidence in emerging economies, fueled by resilient growth, improved fiscal discipline, and the hunt for higher returns amid softening inflation trends in the developed world.

According to recent data from JPMorgan’s EMBI Global Index, the spread between yields on emerging market bonds and comparable U.S. Treasury notes has narrowed significantly in recent months. Analysts point to a combination of factors: moderating inflation, falling interest rates in advanced economies, and stronger-than-expected economic fundamentals in countries such as Brazil, India, and Indonesia.

‘The narrative around emerging markets has changed,’ says Laura Kim, chief EM strategist at GlobalAlpha Partners. ‘Investors are no longer looking at these economies merely as high-risk/high-reward plays. Many are now being rewarded for years of reforms and improving governance.’

The trend reflects a broader global rebalancing. As the Federal Reserve and European Central Bank prepare for potential rate cuts in 2025, capital is flowing back into riskier assets. Emerging market sovereigns and corporates are taking advantage of the window to issue longer-term debt at attractive rates.

This resurgence is not without caveats. Some economists warn that geopolitical risks, volatile commodity prices, and a potential resurgence of U.S. inflation could quickly reverse the current investor enthusiasm. Nonetheless, fund inflows into emerging market debt products have picked up pace, with global EM bond funds attracting billions in net capital over the past quarter.

‘There’s a sense of urgency,’ explains Carlos Mendoza, a fixed income portfolio manager. ‘Investors want to lock in yields while they can. We’ve seen an aggressive bid for both sovereign and corporate paper in Latin America and Southeast Asia.’

Looking ahead, the challenge for emerging markets will be maintaining credibility while navigating a potentially volatile external environment. But for now, the data is clear: the borrowing cost gap between emerging and developed economies is narrowing, and investors are taking notice.