Emerging-market bonds and currencies were severely impacted during the Eurozone debt crisis 15 years ago, but analysts say they are now better equipped to withstand renewed turmoil. Developing nations have improved fiscal positions, and their relatively high bond yields offer greater protection. Emerging-market central banks have demonstrated independence and earned investor trust by navigating past crises, including the pandemic.
Concern over contagion from European bond woes has intensified as the yield spread between French and German bonds reached its highest level since 2011, compounded by rising oil prices from Middle East and Ukraine conflicts. Carol Lye of Brandywine Global noted stronger fiscal dynamics, external balances, and high nominal yields provide structural resilience, adding that light positioning in EM currencies reduces forced selling risk. Brandywine has increased holdings in Latin American currencies while maintaining North Asian exposure tied to AI spending.
The 2011 European debt crisis triggered global risk aversion, pushing investors to safer assets and causing EM outflows; the yield premium on developing-nation dollar bonds over Treasuries peaked at 447 basis points in October 2011, only surpassed in 2020 during the pandemic peak, and now stands at 189 basis points. Despite this, emerging markets have outperformed developed peers this year, with global EM local-currency debt yields at 4.21%, nearly unchanged month-over-month, while 10-year Treasuries surpassed 5%. Eric Fine of Van Eck said EMs are sound credits with independent central banks that have weathered crises, positioning them as alternative reserve assets.
However, risks remain in nations with widening fiscal deficits, where liquidity can deteriorate faster than fundamentals. Brazil, with a fiscal deficit near 10% of GDP and public debt above 80%, is a key watch, though its assets rallied after Flávio Bolsonaro led in the first presidential round. Central and Eastern European EU members are also seen as vulnerable due to deep economic and monetary ties to the Eurozone.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing