Emerging markets debt investment views – October 2025
Emerging market (EM) debt extended its positive momentum in October, supported by resilient fundamentals and attractive yields. We stay positive on EM local rates and select high-yield hard-currency bonds, but have turned more cautious on Indonesia.
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Emerging Markets Debt maintained its strong performance momentum into October 2025, with the US dollar bond segment continuing to see tighter spreads despite a few company-specific challenges, particularly among Brazilian and Turkish corporates, and increased scrutiny of global private credit investments following the collapses of FirstBrands and Tricolor in the US. The J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified gained 2.1% in October, lifting year-to-date returns to +13%. Meanwhile emerging market local-currency debt also remained resilient, with the J.P. Morgan Emerging Markets Global Diversified (GBI-EM) rising 0.5% for the month, taking year-to-date gains to a robust 15.9%. These positive trends remain underpinned by appealing yields, resilient EM macro-economic fundamentals, and abundant global financial liquidity.
Following our recent meetings with several EM policymakers at the International Monetary Fund (IMF) meetings in Washington DC, we also came away encouraged by their policy discipline, strong understanding of global risks, and significant financial buffers that most EM countries have accumulated. These insights reinforce our conviction that the EM universe, while diverse, remains broadly well-positioned to navigate a still-uncertain global environment.
These views are summarised in our sectoral scorecard in figure 1.
As can be seen in the sectoral scorecard above, we remain:
1-Tactically bullish on US interest rate duration:
Attractive valuations in long-dated US Treasuries and early signs of US labour market softening justify this stance. The global disinflation trend and ample financial liquidity provide a supportive backdrop for fixed income. However, we remain alert to potential upside risks to inflation stemming from fiscal imbalances, trade tariffs, and the possibility of growth reacceleration in the US in 2026.
2-Strongly positive on EM local rates:
This long-held view is underpinned by contained inflation in the majority of EMs, high real yields, and ample policy space for rate cuts. Rebuilding FX reserves and the recent return of portfolio inflows further amplify the positive outlook. We forecast a 12-month total return above 11% for EM local debt, with the strongest opportunities in Brazil, Mexico, Hungary, India, the Philippines, Turkey, and Egypt. However, we have turned more cautious on Indonesia where we have been taking profits. An update of our long-term investment outlook for Indonesia is provided below.
3-Neutral EM currencies:
Ongoing structural pressures on the U.S. dollar - including its still extremely overvalued real effective exchange rate, reduced interest rate support, and large fiscal and trade deficits - point to a gradual weakening trend over time. Many global investors who had bet against the US dollar after “Liberation Day” have scaled back those positions, though not entirely, leaving some emerging market currencies still exposed to the risk of a deeper correction.
4-EM Hard-Currency debt: attractive pockets of value in high yield, IG less appealing:
High-yield emerging market bonds denominated in US dollars continue to offer attractive income opportunities, supported by improving credit fundamentals and renewed investor interest in the sector. Over the next 12 months, we expect total returns to exceed 7.5%, driven largely by their strong income potential (or “carry”). The most attractive opportunities remain in countries such as Argentina, Ecuador, Angola, Ivory Coast and Egypt.
Indonesia review:
Institutional erosion and a more expansionary policy mix require a reassessment of our long-held bullish view on the country
We had been bullish on Indonesia for several years, supported by the institutional improvements achieved under the previous administration of former President Jokowi, sustained growth resilience, and contained external and fiscal vulnerabilities. The elevated level of real yields had also made Indonesian local government bonds a significant long-term core exposure in our portfolios for the past 5 years. Throughout this bullish period, we had consistently identified two key signposts that would warrant a reassessment of our positive stance: (i) renewed institutional erosion; and (ii) a lack of unequivocal commitment to fiscal and monetary discipline. Both signposts are now starting to materialise, prompting our current more cautious stance, particularly following the sharp rally in local bond markets that has driven 10-year yields down from a post-Covid peak of 7.9% to around 6% currently (figure 2).
Figure 2: Indonesia 10-year bond yield (%)
Indonesia’s macroeconomic environment is undoubtedly now at risk of renewed fiscal and institutional pressures, especially following recent waves of street protests and a cabinet reshuffle, which has led to the highly credible Finance Minister Sri Mulyani to leave the government.
Continued institutional weaknesses, ramped up at the turn of the year, were exacerbated by continued broadly inconsistent policy communications, including but not limited to the scope and objectives of Danantara, the recently launched sovereign wealth fund and the funding sources of the President’s new policy priorities. While some progress on policy prioritisation is expected, structural governance challenges persist, and the risk of institutional erosion remains a medium-term concern.
Weaker underlying growth dynamics, masked by low volatility in headline GDP statistics, is also contributing to rising investor caution as evidenced by accelerated equity outflows and a lack of foreign appetite for domestic bonds (figure 3).
Figure 3: Indonesia – foreign portfolio flows
We expect the official fiscal deficit ceiling of 3% to be tested in the coming year, if growth does not materially improve in 2026. Fiscal and monetary policies have become more supportive of growth this year, following a substantial injection of liquidity, estimated at over USD 28 billion, into the financial system. This has been achieved through measures such as transferring government cash holdings from the central bank to state-owned banks, reducing the issuance of central bank bills (SRBIs), and lowering reserve requirements for banks. While these measures have led to a surge in domestic liquidity and have provided temporary support to growth, they also heighten longer-term vulnerabilities.
Bank Indonesia (BI) has front-loaded rate cuts and is reportedly considering a broader mandate review with additional objectives beyond price and currency stability. While these initiatives may underpin much-needed near-term growth momentum, achieving the government’s 8% growth target under the newly elected President Prabowo has always been viewed as unrealistic. The presence of substantial fiscal, external accounts and foreign exchange buffers offers some insulation in the short term; however, the persistence of the current policy stance could leave Indonesia exposed again to adverse external developments and global liquidity shifts.
On the external side, estimated foreign exchange conversion levels among exporters remain high, providing some support to the rupiah. Encouragingly, the currency has somewhat served as an orderly shock absorber with the recent gradual depreciation leading to a noticeable improvement in real effective exchange rate valuations and a healthy washout in foreign investor positioning (figure 4).
In sum, while liquidity injections and easing measures provide short-term growth support and a boost for domestic demand for the local bond market, where banks tend to park their excess liquidity, the medium-term outlook is constrained by fiscal slippage risks, the need to respond to weak growth momentum, and governance uncertainty.
As can be seen in figure 5, these factors justify our recent bearish stances on the currency and on the unappealing hard-currency debt spread. Despite our recent downgrade of local government debt, we still retain a neutral stance for now with the view of also possibly downgrading this sector to negative once the current technical support for local government bond has faded (i.e. once the substantial liquidity release has been absorbed).
All these observations are consistent with the findings from our quantitative analysis; our country risk model has been signalling a gradual deterioration across several vulnerability indicators, although these have not yet reached crisis threshold levels (Figure 6).
Figure 6: Indonesia – Schroder Country Risk Model
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