Emerging-market investors, including money managers at Aegon USA Investment Management and JPMorgan Asset Management, are dialing back their riskiest bond bets as a deepening selloff in global credit markets threatens to derail a strong run for debt in the developing world, according to a Bloomberg report published September 27.
A Surprisingly Resilient Market
Despite the recent turmoil, emerging-market dollar debt returned 1.4% over the past year. That performance has come even as yields on US Treasuries have climbed to their highest in nearly two decades and oil has held above $100 a barrel, with investors bracing for higher-for-longer global interest rates.
Why Resilience Is the Worry
The strength itself is what has some managers nervous. Credit spreads are at their tightest since 2007: JPMorgan data put developing-nation dollar spreads at about 170 basis points over Treasuries. With valuations already rich, managers say there is little buffer if global rates jump again, and the bonds are bound to sell off. Bloomberg Intelligence flags Federal Reserve policy as the key threat to hard-currency emerging-market debt in the fourth quarter, and warns that spreads near a 19-year low could make country-specific shocks hit harder.
The Treasury Yield Backdrop
The 10-year Treasury yield has broken above 5% this month, reaching as high as 5.041%, its highest since July 2007. A Bank of America survey found 33% of fund managers now name a "disorderly rise in bond yields" as the biggest market risk, overtaking artificial intelligence. Analysts point to rising oil prices, inflation fears tied to the Iran war, US fiscal concerns, and heavy AI-company spending as key drivers of the surge. The Treasury has responded with a $6 billion debt buyback, triple its normal operations, after earlier efforts to double the program's size.
Is 5% Really the Danger Line?
Investors are debating how much the 5% level matters. One money manager quoted by The National argued "a 10-year 5 per cent Treasury is not unusual" historically and that "people need to be recalibrated." A Reuters analysis on September 23 framed the question differently: for years 5% was seen as the point where global markets would hit turbulence, but the threshold is starting to look less like a ceiling and more like a waypoint, leaving investors wondering whether 6% is the new number to fear. The breach has not lasted long enough yet to properly test that theory.
Why Emerging Markets Are Usually First to Feel It
Emerging markets are often among the first casualties when US yields surge, since higher Treasury returns tend to strengthen the dollar and make dollar-denominated assets more attractive relative to riskier developing-world debt. Flow data cited in the Reuters analysis showed the biggest exodus from emerging-market bond funds in months in the most recent week, with billions also withdrawn from equity funds.
A Global, Not Just American, Bond Selloff
The pressure isn't confined to the US. Analysts note that Japan, Europe, and the UK are also seeing higher long-term rates, which limits the diversification benefit investors would normally get from spreading money across developed-market government bonds and raises what one analysis called "global duration risk."
What's Next
With spreads near 19-year lows, the Fed still leaning hawkish, and Treasury yields testing multi-decade highs, emerging-market bond managers appear to be positioning defensively before the fourth quarter rather than waiting for a selloff to force their hand. Whether the asset class's resilience holds will likely depend on how the Fed's next move, oil prices, and the Treasury market's own stability play out in the coming weeks. For the full report, see Bloomberg's original article.