Emerging-market investors from Aegon USA Investment Management to JPMorgan Asset Management are dialing back their riskiest bond bets as the deepening selloff in global credit markets threatens to derail a stellar run for debt in the developing world. Dollar debt from countries in the emerging world returned 1.4% over the past year despite the recent turmoil that has sent yields on US Treasuries to the highest in nearly two decades. Even with oil above $100 a barrel and investors bracing for higher-for-longer global interest rates, credit spreads are at their tightest since 2007, raising alarm bells for money managers who say the bonds are bound to sell off.

When we have rising government rates, I get a little concerned on what that does to the level of spread, said Jeff Grills, the head of EM debt at Aegon. When I look at where are the great opportunities, they are hard to find. Grills recently trimmed his exposure to Colombia, while adding debt from higher-rated credits like Indonesia, Saudi Arabia and the Philippines. He’s not alone. At Neuberger Berman, Gorky Urquieta has reduced positions in high-yield debt from Ecuador, Dominican Republic and Zambia, and is struggling to find ways to add risk to the portfolio. We’ve been a little bit more on a retrenchment mode, Urquieta said.

The pullback comes after emerging markets proved surprisingly resilient through a sharp repricing in global rates and the conflict in the Middle East. Sticky inflation and a resilient US economy have fueled a surge in Treasury yields as traders price in more aggressive path for Federal Reserve tightening. Yet emerging-market dollar bonds have so far managed to hold on to gains. Spreads on developing-nation dollar bonds over US Treasuries stand at just 170 basis points, the tightest since 2007, according to JPMorgan Chase & Co. data. That relative strength is part of what has investors uneasy. With valuations still rich and Treasury yields moving sharply higher, emerging-market credit has less room to absorb another global rates shock without spreads widening. Bloomberg Intelligence sees Fed policy as the main risk to hard-currency emerging-market debt in the fourth quarter, saying spreads near a 19-year low could amplify the impact of country-specific bonds. Caution is beginning to show up in fund flows, too. The world’s largest exchange-traded fund tracking emerging-market hard-currency bonds suffered some of its biggest single-day outflows since March last week.