Insights

Emerging Market Debt Market Commentary: Q2 2025

July 23, 2025

The second quarter of 2025 was heavily marked by US trade tariff developments, shifting economic data, and escalating geopolitical tensions. For investors in emerging market (EM) debt, focus was primarily on idiosyncratic considerations related to the reciprocal tariffs levied by the Trump administration at the start of April, which were then suspended in most instances to allow for trade negotiations. A 10% baseline tariff was applied to all nations, and this was supplemented by additional levies for countries that run a trade surplus with the US. The uncertainty that this created for global trade and concerns around prospects for the US economy prompted investors to question the safe-haven status of US Treasuries. This triggered a sell-off in long-dated US government bonds, with the consequent rise in risk aversion resulting in wider EM sovereign spreads, although these later compressed after the US announced a delay in the implementation of reciprocal tariffs, with China initially a notable exception.

Elsewhere, geopolitical risks escalated, with strikes by the Indian army in Pakistan in response to the terror attack in Kashmir in April. Israel’s attack on Iranian military and nuclear structures in June spurred a retaliatory response and the US got involved by bombing key nuclear facilities in Iran. In Romania, there was a clear victory for centrist presidential candidate Nicusor Dan. In Poland, the right-wing candidate Karol Nawrocki became president after a run-off election in June. The EM risk backdrop was also impacted by oil price fluctuations through Q2 as markets factored in a complex range of economic and geopolitical issues. On the monetary policy front, a number of EM central banks cut rates with Brazil an outlier in raising rates.

Overall, both EM local and hard currency bonds posted positive returns in Q2. EM local currency bonds continued to benefit from US dollar weakness and high real yields, while EM hard currency debt benefited from compression in sovereign spreads as the quarter progressed. Seventeen of the 19 currencies in the JP Morgan GBI-EM Global Diversified Index gained against the greenback in Q2.

Discover More

Disclosure

statestreet.com/investment-management

State Street Global Advisors (SSGA) is now State Street Investment Management. Please click here for more information.

Important Risk Information:

Marketing Communication

State Street Global Advisors Worldwide Entities

The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the applicable regional regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Past performance is not a reliable indicator of future performance.

Investing involves risk including the risk of loss of principal.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

Diversification does not ensure a profit or guarantee against loss. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses associated with the fund or brokerage commissions associated with buying and selling a fund. Index performance is not meant to represent that of any particular fund.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise bond values and yields usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. Investing in high yield fixed income securities, otherwise known as junk bonds, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on certain assumptions and analyses made by SSGA in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances, many of which are detailed herein. Such statements are subject to a number of assumptions, risks, uncertainties, many of which are beyond SSGA’s control. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

The returns on a portfolio of securities which exclude companies that do not meet the portfolio's sustainable strategy criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's sustainable strategy criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.

The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this material are the views of the EMEA Fixed Income Specialists of SSGA’s Global Fixed Income Group through the period ended 30 June, 2025 and are subject to change based on market and other conditions.

More On Fixed Income

View All Fixed Income Insights