Emerging Market Debt: Risk Overpriced, Resilience Underestimated

GMO’s Fixed Income Insights (Oct 2025) argues that hard currency emerging market (EM) debt continues to deliver attractive risk-adjusted returns despite recent shocks.

• EM sovereigns weathered multiple crises—COVID, war-driven inflation, and Fed tightening—without systemic defaults; no sovereign has defaulted in 2024–25.

• Recent restructurings in Ecuador, Zambia, Ghana, and Sri Lanka delivered recoveries above 50 cents on the dollar, consistent with long-term norms.

• Historically, EM hard currency debt earned 3–4% excess return over developed market bonds, with credit spreads still compensating more than actual default risk; GMO also sees value in EM local currencies versus the U.S. dollar.

Does EM debt deserve a permanent seat in diversified portfolios? The full report makes a compelling strategic case