Why EMD has weathered the Treasury sell-off

Emerging-market debt has remained resilient during the US Treasury sell-off because higher carry, stronger fundamentals and diversified return drivers have offset rising duration risk.

• The US 10-year Treasury yield rose from below 4% in early March to above 5.2% at the end of September, while EM sovereign spreads widened by only about 9 basis points year to date.
• Frontier sovereigns returned 3.97% year to date, sovereign high yield 2.23% and EM corporate high yield 3.29%, as carry and improving credit fundamentals cushioned higher US rates.
• Frontier sovereign debt had only 0.03 correlation with US Treasuries over 2005–2025, compared with 0.33 for EM hard-currency sovereigns, highlighting the diversification offered by less Treasury-sensitive segments.
• High-carry frontier currencies including the Paraguayan guarani, Kazakh tenge and Nigerian naira generated positive returns against the US dollar despite higher Treasury yields, supported by domestic policy and external fundamentals.
• Indicative yields are around 7.1% for broad hard-currency sovereign debt, 8.1% for sovereign high yield and above 9% in frontier markets, while EM corporate default rates are expected to remain contained into 2027.

Takeaway: Investors do not need to assume that Treasury yields have peaked to justify EMD, but they must distinguish among sovereign credit, local rates, currencies, corporates and frontier markets because their resilience depends on different country and credit fundamentals.