Emerging Market Bond Index Spread Falls Below 2% for First Time in 20 Years
on Growing Expectations of U.S. Rate Cuts
Emerging market (EM) companies are flocking to the international bond market. Since the risk premium on EM bonds in the global bond market has dropped to its lowest level in 20 years this year, these companies are rushing to issue bonds to take advantage of the window of opportunity. Experts caution that the market is overly betting on optimism, and advise that uncertainties stemming from the tariff policies of the Donald Trump administration should not be overlooked.
The Financial Times (FT) reported on the 17th (local time), citing data from JP Morgan and S&P Global, that EM companies and banks, excluding those in China, issued at least $250 billion (approximately 347.5 trillion won) in bonds from January to July this year. This figure is close to the total issuance for the entire year of 2021. JP Morgan forecasts that international bond issuance by EM companies, excluding China, will reach about $370 billion in 2025. Including China, the total could reach as much as $433 billion.
This surge is driven by a reduction in the risk premium (interest rate spread). The risk premium refers to the additional compensation investors require for choosing riskier assets over safe ones; its narrowing indicates that investors are perceiving less risk.
Expectations of interest rate cuts have fueled demand for bonds, which in turn has pushed yields lower and further reduced the risk premium. In addition, although EM sovereign bond yields remain high at around 6%, the yield gap with U.S. Treasuries has narrowed significantly this year as U.S. Treasury yields have surged due to widening fiscal deficits and weak demand. As a result, the relative appeal of EM bonds has become more pronounced. In fact, the JP Morgan Emerging Markets Bond Index (EMBI) spread, which measures the yield gap between developed and emerging markets, has fallen below 2% for the first time in 20 years.
For EM companies, which have historically been required to pay higher interest rates than their developed market counterparts, this represents an opportunity to borrow at lower costs. Some governments, including those of Saudi Arabia and Mexico, are also actively raising funds in the global bond market for domestic investment and fiscal support. So far this year, international bond issuance by EM governments has increased to about $160 billion.
FT noted, "Pressure from the Trump administration on the U.S. Federal Reserve is fueling expectations of rate cuts, and investors are anticipating even more accommodative monetary policy," analyzing that EM companies that had postponed issuances are now returning to the market in response to this environment.
However, some point out that the market is betting on optimism too quickly, despite the continued presence of structural risks such as uncertainty over tariff policies and signs of a slowdown in the U.S. economy. Reuters warned, "In 2025, EM assets have enjoyed a major rally thanks to a weaker dollar, but as the dollar rebounds and uncertainty over U.S. tariff policy resurfaces, risks are also rising."
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