Emerging market (EM) bonds have had an impressive year so far, delivering double-digit total returns across both hard and local currency. This compares favourably with developed market (DM) bond returns, and so EM should continue to attract crossover investors who have the mandate to allocate some of their capital to EM when they see fit. Nowadays, the investment rationale is often reinforced by a popular argument that some of the developed markets have recently witnessed high policy uncertainty which was more prevalent only in EM in the past. Ongoing US tariff-related noise, perceived threat to independence of the Federal Reserve under President Trump and prolonged political instability in France are perhaps the most vivid examples of that. However, it is worth noting that the convergence between EM and DM is also happening from the other side – through significant improvement in the quality of policy and institutions across many EM countries in the past decade.

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