Investing Assets & Markets Bonds What Are Emerging Market Bonds? By Thomas Kenny Updated on October 21, 2022 Reviewed by Gordon Scott Fact checked by Hilarey Gould In This Article View All In This Article How Do Emerging Market Bonds Work? Performance of Emerging Market Bonds Who Issues Emerging Market Bonds? How To Invest in Emerging Market Bonds What Emerging Market Bonds Mean for Investors Frequently Asked Questions (FAQs) Photo: Westend61 / Getty Images Definition Emerging market bonds are fixed-income investments issued by the governments or corporations of countries that are not considered to be developed nations. Key Takeaways Emerging market bonds are issued by governments of countries that are not as developed as others around the world.Countries that may offer investors a chance to buy an emerging market bond include Chile, Croatia, Egypt, and more.To invest in an emerging market bond, you can buy shares of a mutual fund or exchange-traded fund (ETF) that includes emerging market bonds, or you may be able to buy an emerging market bond through a country's website, similar to the United States' TreasuryDirect website.Emerging market bonds may be more volatile and higher risk investments. It may also be difficult to obtain reliable information for these bonds, so invest with caution and discuss it with someone you trust first. How Do Emerging Market Bonds Work? Emerging market bonds are seen as being higher risk, meaning they can offer bigger returns, but also bigger losses. That's because smaller, less developed countries have been perceived as more likely to experience sharp economic swings, political upheaval, and other disruptions not typically found in countries with more established financial markets. Like high-yield bonds, emerging market debt is an asset category for investors who are willing to stomach above-average credit risk in the quest for higher longer-term returns. On the spectrum of risk and reward, emerging market bonds fall in between investment-grade corporate bonds and high-yield bonds. Emerging market debt should, therefore, be considered a longer-term investment that isn’t suitable for someone whose top priority is the preservation of capital. Example of Emerging Market Bonds Let's say you bought an emerging market bond from Mexico. The issuer of the bond is Mexico, and it's a 10-year bond (MBONOS). The face value is 100 pesos (about $5.02, as of October 2022). You're paid interest every six months, and after 10 years, you receive your principal investment back, plus all of the interest you earned during that time. One easier way to invest in an emerging market bond is through an ETF. For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF gives investors exposure to U.S. dollar-denominated emerging market bonds. On Sept. 30, 2022, the end of the third quarter of that year, this ETF had a total return of 3.26% since its inception. Note It's important to keep in mind that emerging market bonds also experience more volatility than most other securities in the fixed-income universe. It may not be a top consideration for those investing for the long term. Performance of Emerging Market Bonds Emerging market bonds have evolved from being an extremely volatile asset class in the early 1990s to a large, more mature segment of the global financial markets today. Emerging nations have gradually improved in terms of political stability, the financial strength of the issuing countries, and the soundness of government fiscal policies. While a number of developed nations still struggle with budget deficits and high debt, many developing countries feature sound finances and more manageable levels of debt. Additionally, developing countries—as a group—can enjoy stronger rates of economic growth than their developed-market peers. Emerging market bonds remain vulnerable to external shocks that weaken investors’ appetite for risk. The asset class, therefore, remains volatile despite the fundamental improvements in the economies of the underlying nations. Who Issues Emerging Market Bonds? A large number of countries issue emerging market bonds for investors to buy. For example, you can buy bonds or invest in bonds from countries like Argentina, Brazil, and Mexico. Note If you're interested in buying a bond from a certain country, you can look to see if the country issues it by searching online. Just make sure you're reading a reputable website and don't give your money or any personal information away to anyone if you're not sure they can be trusted. Talk to a financial professional before investing. How To Invest in Emerging Market Bonds Investors can choose between mutual funds and exchange-traded funds (ETFs) that invest in either dollar-denominated emerging market debt or debt issued in local currencies. For example, in issuing debt, a country such as Brazil can sell bonds denominated either in dollars or the country’s currency—the real. Dollar-denominated debt tends to be more stable, while local currency debt is generally more volatile. However, local currency debt can, in the longer term, provide another way to capitalize on the strong economic growth and finances of emerging market countries. The option you choose depends on your tolerance for risk. Investors aren't limited to just government bonds in emerging markets. Corporations in developing countries also issue debt and this asset class is rapidly growing in popularity. While many emerging market funds put a portion of their assets in corporate bonds, investors can also access the asset class directly through ETFs such as WisdomTree Emerging Markets Corporate Bond Fund (EMCB). What Emerging Market Bonds Mean for Investors Emerging market bonds can provide diversification for those with bond portfolios that have more of a U.S.-centric focus. Emerging economies don’t always move in tandem with developed economies, which means that the bond markets of the two groups can also provide divergent performances. Be aware, however, that the asset class can mirror the performance of the world stock markets. As a result, it can provide a measure of diversification for someone whose portfolio is heavily tilted toward stocks, but not as much as you might expect. Frequently Asked Questions (FAQs) Why are emerging market bond yields usually high? Emerging markets usually have government bonds with high yields because of the risk the investor takes on. While government bonds in the U.S. are usually guaranteed, emerging market bonds may not be, which means you may not get your principal or interest paid back to you at the end of the term. Why would an emerging market bond issuer default? An emerging market bond issuer could default because of political, economic, or cultural risks and events. If a country's financial market is not stable, it could be impacted by unforeseen circumstances, which could cause it to default and not pay bondholders what they're owed. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. FINRA. "Bonds: Types." Board of Governors of the Federal Reserve System. "Differential Treatment in the Bond Market: Sovereign Risk and Mutual Fund Portfolios." The Mexican Government Securities Market. "II. Types of Instruments and Their Placement." iShares. "iShares J.P. Morgan USD Emerging Markets Bond ETF." Board of Governors of the Federal Reserve System. "Brady Bonds and Other Emerging Market Bonds." S&P Dow Jones Indices. "Fixed Income 101: Mexico." WisdomTree. "EMBC: WisdomTree Emerging Markets Corporate Bond Fund."