Why Emerging-Market Bonds Look More Resilient in 2026
Emerging-market bonds are positioned for greater resilience in 2026 due to increased domestic ownership, with foreign holdings declining significantly in key markets like Mexico and Indonesia. The asset class delivered strong 9.30% returns in 2025 while showing reduced volatility and decoupling from U.S. Treasuries, supported by local pension funds and insurers providing more stable, long-term investment.
*this image is generated using AI for illustrative purposes only.
Emerging-market bonds are expected to remain well-supported in 2026 as domestic investors increasingly dominate ownership of these securities, creating a more stable foundation less susceptible to currency-related volatility. Fund managers highlight this fundamental shift in ownership structure as a key factor underpinning optimism for the asset class in the year ahead.
Dramatic Shift in Ownership Patterns
The transformation in emerging-market bond ownership has been particularly pronounced across major developing economies. Domestic funds have steadily increased their holdings of local-currency government debt, reflecting the deepening of capital markets in these nations.
| Country | Foreign Ownership 2020 | Current Foreign Ownership | Change |
|---|---|---|---|
| Mexico | 29% | 11% | -18 percentage points |
| Indonesia | ~40% | ~13% | -27 percentage points |
Local pension funds and insurance companies have expanded their bond portfolios to meet rising long-term liabilities, further strengthening the domestic investor base. This shift has created a more resilient foundation as domestic buyers are generally insulated from currency fluctuations and tend to act as longer-term holders.
Enhanced Performance and Reduced Volatility
Emerging-market bonds demonstrated exceptional performance in 2025, reinforcing investor interest in the asset class while showing improved stability metrics compared to developed markets.
| Performance Indicator | Emerging Markets | Developed Markets |
|---|---|---|
| 2025 Return | 9.3% | 6.3% |
| Yield Change Standard Deviation (12 months) | 0.02 | 0.04 |
| Correlation with US Treasuries (November) | -0.06 | N/A |
A Bloomberg index tracking emerging-market bonds rose 9.30% in 2025, marking the best annual performance since 2019. The reduced volatility is evident in the standard deviation of yield changes, which stood at 0.02 compared to 0.04 for developed-market counterparts over the past 12 months.
Decoupling from Global Markets
Emerging-market local-currency bonds have increasingly decoupled from moves in U.S. Treasuries, demonstrating growing independence from global market forces. The 120-day correlation between yields on Bloomberg's emerging-market local-currency government bond index and a comparable U.S. Treasury index fell to -0.06 in November, the lowest level since 2014.
This decoupling reflects how declining offshore ownership can reduce a market's sensitivity to global shocks by allowing domestic factors to play a greater role in driving prices. The trend is increasingly seen as a sign of growing maturity and resilience of emerging-market financial systems.
Indonesia Case Study: Domestic Resilience in Action
Indonesia provides a compelling example of how stronger domestic demand can offset foreign outflows and provide market stability. Global investors withdrew more than $4.00 billion from Indonesian sovereign bonds following Finance Minister Sri Mulyani Indrawati's resignation in September.
Despite these significant outflows, Indonesian bonds rallied, supported by domestic demand after the central bank cut interest rates and transferred approximately 200 trillion rupiah ($11.90 billion) from Bank Indonesia to state-owned banks. This transfer enabled domestic lenders to increase their bond purchases, demonstrating the stabilizing effect of local investor participation.
Strategic Outlook for 2026
Fund managers emphasize that the structural changes in ownership patterns position emerging-market bonds favorably for 2026. International investors typically hold local-currency bonds without hedging foreign-exchange risk, making them more likely to reduce exposure during periods of currency weakness. In contrast, domestic buyers are generally insulated from such moves and provide more stable, long-term support.
With domestic investors playing a larger role and correlations with global markets easing, emerging-market bonds could enter 2026 in a stronger position to weather external volatility than in previous cycles. This enhanced resilience, combined with the deepening of local capital markets, suggests a more mature and stable foundation for the asset class going forward.
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