Emerging Market Debt: Outlook 2026
December 2025 | Philip Meier | Belinda Hill
As we look ahead to 2026, emerging markets debt (EMD) stands at a rare intersection of macro resilience, favourable technicals and attractive valuations.
After years of underallocation and heavy outflows, EM debt allocations remain historically low, leaving the asset class clean from a positioning perspective – and increasingly attractive to global investors seeking income, diversification, and long-term structural growth exposure.
With the US rate cycle peaking, fiscal concerns rising in developed markets (DMs), and the dollar gradually softening, investors are reassessing where real value lies in fixed income. EMs continue to offer compelling real yields, supported by higher nominal yields and moderating inflation. The Organisation for Economic Co-operation and Development (OECD) forecasts EM real GDP growth at 3.9% in 2026, more than double the expected 1.5% in DMs.1 Combined with yields ranging from 6.0% to 9.0% across hard currency sovereigns, local currency sovereigns and hard currency corporates forms the backbone of our strategy. With EM central banks having tightened early and now pivoting to easing cycles, and with real yields offering substantial buffers, 2026 is shaping up to be a year of opportunity for the asset class.
Can EM debt deliver consistent returns amid US fiscal slippage, dollar weakness and policy divergence?
There is growing concern around long-term US fiscal sustainability and dollar debasement. We believe EM debt, with higher real yields and cleaner balance sheets, can provide not just income, but also portfolio resilience and diversification.
EM debt remains one of the few global fixed-income segments offering positive real yields. EM debt-to-GDP ratios remain significantly below those of DMs, and technicals are cleaner after years of outflows. Our base case for 2026 anticipates total returns of 8%–10%, driven by attractive carry, potential local currency appreciation in selected markets and moderate spread compression among higher-quality sovereign and corporate issuers.
As EM central banks shift more decisively into easing cycles – with scope for 150–200 basis points of cuts through 2026 – monetary policy is becoming more bond-friendly. Real yields remain elevated, especially in local currency markets, providing meaningful buffers against inflation and currency volatility. A gradual 3%–5% weakening of the US dollar adds a constructive backdrop for FX-linked exposures. Hard currency sovereigns, offer attractive nominal yields in USD, especially in countries showing improving fiscal discipline, external rebalancing or reform momentum.
Active management, using tools like duration management, relative value positioning and tactical overlays, will be key to navigating policy shifts, geopolitical developments and global market volatility.
Lessons from 2025
The primary lesson from 2025 was clear: differentiation matters, both in credit and geography. Despite volatility around April’s US tariff announcements and renewed dollar strength mid-year, EM growth held steady at 4.1%.
First, tariff and geopolitical risks are increasingly sector- and country-specific, with ASEAN corporates and Eastern European sovereigns proved resilient. In 2026, we are translating that lesson into more targeted exposure, avoiding overconcentration in trade-sensitive credits and emphasising intra-EM trade beneficiaries.
Second, 2025 reaffirmed that credit momentum outweighs static credit ratings. In the sovereign space, several high yield issuers outperformed as they made meaningful progress on fiscal consolidation, secured external financing or implemented structural reforms. Conversely, some investment grade sovereigns lagged as political uncertainty and fiscal slippage challenged investor confidence. In contrast, corporate credit saw the reverse dynamic: investment-grade corporates broadly outperformed high yield, thanks to strong balance sheet and sector defensiveness. Taken together, the lesson is clear – markets rewarded positive change, whether through upgrades, reform narratives or credible policy execution.
Third, local currency assets delivered strong performance, benefiting from favourable real yield differentials, early policy normalisation and improving investor sentiment. EM FX saw support from domestic credibility and a softer dollar.
Opportunities in 2026
In a world of diminished DM returns and rising fiscal fragility, EM debt is reasserting itself as a strategic allocation.
The opportunity set across EM debt is arguably the strongest it has been in years. Global fixed income markets are grappling with reinvestment risk as DM yields compress and inflation remains sticky. EM, by contrast, offers yield, growth and diversification – all in one asset class.
Across the asset class, local currency sovereigns continues to benefit from early and credible monetary tightening cycles, now giving way to easing. This, combined with still-attractive real yields and improving inflation dynamics, offers both carry and duration upside in select markets. Hard currency sovereigns also present value in reform-oriented countries, while corporates maintain healthy balance sheets and modest leverage compared to DM peers.
Technical factors are turning supportive. After years of sustained outflows, EM debt is under-owned, and 2025 saw a meaningful pickup in crossover participation. With modest net new issuance, supply-demand dynamics are more balanced, creating a favourable backdrop for performance and investor re-engagement.
Finally, a softening of the dollar, driven by growing concerns around US fiscal sustainability and the broader debasement debate, adds a tailwind for EM, particularly in local markets. While not the primary return driver, improved external liquidity and relative currency stability could enhance performance.
Given the shifting landscape – where geopolitics, industrial policy, and trade realignments are playing a more prominent role in investment outcomes – flexibility and active management will be critical. The opportunity is real, but so is the need to remain nimble in navigating both risk and reward across the evolving EM universe.
In a world of diminished DM returns and rising fiscal fragility, EM debt is reasserting itself as a strategic allocation, not just a tactical trade. It offers compelling income, diversification and alignment with global growth trends. With real yields that remain attractive compared to DMs, supported by improving inflation dynamics and stronger fiscal fundamentals, EM fixed income provides investors with valuable inflation protection and income generation. We believe EM fixed income is well positioned for 2026.
GAM partners with Gramercy, who manages the Emerging Market Debt strategies for GAM Investments.
1Source: Gramercy, OECD, OECD Economic Outlook, Interim Report September 2025: Finding the Right Balance in Uncertain Times, 23 September 2025.