FX and Rates Shine in EM Debt

GMO’s 2Q 2025 Emerging Debt Valuation Update evaluates relative value across sovereign credit, local rates, and FX, helping institutional allocators calibrate EM exposure using fundamental signals.

• FX stands out: EM currencies screen in the most attractive quartile, with spot return expectations near 8.7%, reflecting valuation gaps versus a still-rich U.S. dollar.

• Local rates attractive: EM interest rates offer a favorable 0.4% gap over U.S. rates, historically tied to outperformance in blended portfolios.

• Hard currency credit neutral: EMBIG-D spreads tightened to 266 bps, with excess spreads in the second quintile and mixed credit signals.

How can valuation metrics guide forward-looking EM allocations? The full report outlines relative signals across currency, credit, and rates for both USD and local investors.