Borrowing costs have surged from Washington to Tokyo as investors price in the inflationary impact of higher energy prices and growing fiscal deficits, fuelling expectations that interest rates will remain elevated.
Aubenas argued that longer-dated emerging market investment-grade debt had held up better than U.S. Treasuries during the recent bond-market selloff.
"There is nervousness if you're holding 30-year Treasuries, but if you're holding 30-year investment-grade dollar debt, whether it's sovereign or corporate, you sleep much better at night because it's much less volatile — and we've seen that from our crossover investors," Aubenas said.
Dollar weakness and investor flows seen as support
"We're going into the last four months of the year with a market that is still quite sceptical and quite nervous about the Fed outlook," Aubenas said.
Emerging markets have contended with a resilient dollar, a historically weak yen and elevated oil prices, weighing on many Asian currencies, he said.
"Once we start to dissipate some of these top-down macro factors, we can go back into the previous trend of moderate dollar weakness, which is supportive of the return," he said.
JPMorgan indexes show emerging market local-currency debt returning 3.5% so far this year, while hard-currency debt has returned 2.3%.
Aubenas said he remains bullish across the asset class, particularly local debt, citing supportive economic fundamentals and investor flows for emerging economies.
"I'm expecting that the rest of the year we'll see a catch-up of total return to our initial scenario," Aubenas said.
BlackRock keeps bullish view on emerging market debt
BlackRock is sticking with its bullish outlook for emerging market debt even as returns lag its forecasts, betting that easing concerns about the dollar and the Federal Reserve will help the asset class recover in the final months of 2026.
The world's largest asset manager predicted at the onset of 2026 that hard-currency bonds issued by emerging market economies would see total returns in the mid- to high-single-digits and high single- to low-double-digit returns for local debt.
While those forecasts have yet to materialise, Michel Aubenas, head of emerging market debt at BlackRock, expects the asset class to catch up as greater clarity on the Federal Reserve's policy path revives demand for higher-yielding assets.
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