One thing that’s clear from the episodes of market turmoil of the last few years is that asset classes are not behaving as investors have traditionally expected. Traditional ‘safe haven’ debt markets have become less dependable and more volatile in recent years, while supposedly ‘risky’ areas of the market have shown surprising resilience.
The once distinct line between developed market (DM) and emerging market (EM) assets appears to have blurred – prompting global investment manager Ninety One to describe this shift as the ‘EM-ification of DM’ several years ago. This, together with other macroeconomic and geopolitical shifts, has profound implications for asset allocators.
Unexpected behaviour in bond markets
In recent years, the volatility of asset classes traditionally viewed as risk-free, such as the UK Gilt, German Bund and US Treasury markets, has shifted gears. In fact, considering the behaviour of both DM and EM asset classes from a risk and return perspective, there appears to have been a blurring of lines.
Since 2022, returns have been lacklustre in DM bond markets, while EM bonds have shown surprising resilience to challenges that would have tested them in the past (Figure 1). Meanwhile, despite easing off more recently, volatility in DM bond markets remains elevated, but EM volatility has stayed within its historical ranges (Figure 2). Furthermore, there have been episodes of ‘bear steepening’ in DM yield curves – an unenviable phenomenon that’s traditionally reserved for EM bond markets and, according to Ninety One, reflects concern around policy credibility.
Figure 1: Surprising resilience in EM bond market returns
Source: September 2025. Rolling 3-year excess returns over cash. EM bond = JPMorgan GBI-EM unhedged. DM bond = equal weighting of USD hedged US, Japan, Germany, UK, Canada, New Zealand from Bloomberg Barclays Aggregate series.
Figure 2: Bond market volatility – higher in DM, no real change in EM
Source: September 2025. EM bond = JPMorgan GBI-EM unhedged. DM bond = equal weighting of USD hedged US, Japan, Germany, UK, Canada, New Zealand from Bloomberg Barclays Aggregate series.
Shifting dynamics in EM/DM economies
Three broad developments could help explain the recent shift in DM bond market volatility and the blurring of lines between DM and EM bond market behaviour. These include increasing uncertainty around policymaking in DMs, contrasting with the adoption of more orthodox monetary policy and greater fiscal restraint in many EM economies.
Many EM central banks moved swiftly to raise interest rates as inflation began to rise after the pandemic. In contrast, monetary policymakers in some of the world’s largest economies were slower to act, having deemed inflation ‘transitory’, meaning the eventual rate-hiking cycle was possibly faster and more disruptive than the path followed by EM central banks.
At the same time, fiscal fundamentals across many EM economies have generally strengthened, in stark contrast to the erosion of fiscal discipline in parts of the developed world. Spurred on by the upheaval of the 2013 taper tantrum, many EM economies have undergone a significant rebalancing.
While exceptions remain, credible policymaking and fiscal reform have become unmistakable features of the EM landscape, underpinning greater resilience – and prompting credit-rating upgrades, according to Ninety One.
These improvements stand out against developments in many advanced economies, namely political instability, rising populism and unsustainable public finances.
While each country’s political backstory is unique, the underlying theme is a deterioration of macroeconomic fundamentals. All of this is prompting greater caution – and, in some cases, higher risk premia – from investors.
Reassessing fixed income’s defensive role
In addition to entering a new volatility regime, DM debt has also seen its role as a defensive portfolio allocation put to the test.
For decades, investors have been accustomed to dealing with ‘demand shocks’ in the global economy – disruptions to aggregate demand, such as the Global Financial Crisis. The market implications of these were predictable: slower growth typically led to lower inflation, allowing fixed income to perform well as a defensive asset.
In the past 5–10 years, however, the global economy has been hit by a succession of ‘supply shocks’ – from Brexit and trade tariffs to the pandemic and Russia’s invasion of Ukraine. Analysis of these can be more complex, and they tend to result in growth and inflation moving in opposite directions (slower growth and persistent inflation). As a consequence, correlations between defensive and cyclical assets have risen, leaving DM bonds less effective at shielding investors from equity market losses when they occur. In short, the role of interest-rate risk and duration is evolving.
These changes have significant implications for how investors think about portfolio balance and the role of EM debt within it.
Collectively, the shifts outlined above point to the need to view DM debt markets in a different light when considering portfolio allocations. The same can be said for EM debt, where perceptions are often outdated, as outlined in Ninety One’s EM debt: the evolution of an asset class report. Over the past decade, the asset class has matured to become a higher quality, and highly diverse, global opportunity set.
Reframing risk and return for the decades ahead
Heightened volatility in the DM bond market shifts the risk side of the risk-return equation, suggesting investors may need higher returns to replicate past outcomes. For investors to achieve the same Sharpe ratios from their DM and EM allocations as before, today’s lower DM yields imply a much higher capital gain requirement, whereas current yields in EM already provide most of the required return.
Furthermore, the next decade may prove more favourable for EMs as the US dollar headwind begins to weaken and structural themes such as deglobalisation, the transition to a low-carbon economy and demographics shape market behaviour.
Taken together, these trends are reshaping how investors think about risk, return and diversification in global bond markets. Shifts in asset-class behaviour, coupled with the changing nature of economic shocks outlined above, mean the case for portfolio diversification has rarely been stronger.
Asset allocators now need to think about diversification across new dimensions. In the past, it was defined largely by region, currency or asset type; but the evolving role of interest-rate risk and duration is an equally important consideration. This suggests a more global fixed-income portfolio – one that includes EM debt and, in many cases, carries somewhat shorter duration.
EM debt can offer particular value as a portfolio diversifier, given the differing behaviour of its sub-asset classes through the economic and monetary-policy cycle, and the large dispersion across markets that sit within these. Investing across the full EM debt universe can allow investors to benefit from that differentiated performance.
The new landscape
Bond markets appear to have entered a new regime – one where traditional distinction between DM and EM debt have broken down, and investors can no longer assume asset classes will behave as they once did. In short, the ‘EM-ification of DM’ is well under way.
Asset allocation may require rethinking in a world where portfolio diversification has rarely been more valuable – yet the means of achieving it have evolved. Against this backdrop, and supported by a sustained improvement in fundamentals, EM debt deserves a place at the global investor’s table.
Peter Kent
Co-Chief Investment Officer, Fixed Income at Ninety One
