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EM debt now more orthodox than developed markets, managers say

The commentary cites real yields, fiscal rules and a 0.68 correlation with the Bloomberg US Aggregate.

At a glance

  1. For an insurer's general account, the 0.68 correlation with the Bloomberg US Aggregate is the number to test for the defensive portion of the portfolio, the authors said.
  2. Many emerging markets entered the second half of 2026 with more orthodox policy settings, healthier real yields and better inflation dynamics than developed-market peers, the authors said.
  3. The dollar's purchasing power has entered a decline, turning persistent US twin deficits into a structural tailwind for local-currency emerging-market debt, they said.

Emerging-market debt now offers more orthodox policy settings and healthier real yields than developed markets, Jason DeVito and Mohammed Elmi said in Insurance AUM Journal.

They traced the change to the years after the 2008-09 financial crisis, when many emerging markets adopted inflation-targeting regimes, fiscal rules and tighter macroprudential regulation, improving their capacity to absorb external shocks and securing access to International Monetary Fund lending instruments for several countries.

For an insurer's general account, the 0.68 correlation with the Bloomberg US Aggregate is the number to test for the defensive portion of the portfolio, the authors said. The local-currency case depends on the dollar weakening.

Many emerging markets entered the second half of 2026 with more orthodox policy settings, healthier real yields and better inflation dynamics than developed-market peers, the authors said. Some developed markets remain constrained by sticky inflation, wider fiscal deficits and higher long-dated bond yields.

The dollar's purchasing power has entered a decline, turning persistent US twin deficits into a structural tailwind for local-currency emerging-market debt, they said. Large fiscal deficits alongside a current-account deficit can continue to weigh on the dollar.

The J.P. Morgan EMBI Global Diversified Composite Index has shown a 10-year correlation of about 0.68 with the Bloomberg US Aggregate Bond Index and about 0.75 with the Bloomberg Global Aggregate Index, the authors said. Returns are shaped by a distinct mix of local policy, currency and growth factors rather than moving in tandem with developed-market rate and credit cycles.

A reversal of the dollar, they said, would test the local-currency correlation argument.

Reported by the Insurer portfolios desk from Insurance AUM Journal. Published . Corrections

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