When safe havens aren’t safe: Do EM investors have a home-field advantage?

For decades, investors thought they knew the rules. Developed market (DM) bonds were ‘safe havens’: stable, predictable, and underpinned by powerful central banks that acted as buyers of last resort when times were tough.

Emerging market (EM) bonds, meanwhile, were treated with suspicion—too much political risk, fears of inflation, and the potential for debt spirals (where more debt is required to finance existing debt and interest payments).

But the world has changed. The risk differential between EMs and DMs has steadily declined. Some DMs are beginning to look, in risk terms, a lot like EMs used to look, while many EMs have worked hard to strengthen their fundamentals. In some cases, the traditional roles have not just blurred – they’ve inverted. The result is a global fixed-income landscape that looks far less familiar, and far less predictable, than it did a decade ago.

At the same time, the payoff for investors has shifted. Real returns on EM sovereign bonds have risen, while real yields on those supposedly ‘safe’ DM assets have broadly declined (and the few increases in real DM yields have been marginal). The irony is hard to miss: what investors once feared has become familiar, and what was once relied on has become far less predictable.

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