After Tariff Turmoil, World's Riskiest Bonds Lure Traders Back

Investors are gradually returning to some of the riskiest corners of the emerging-market debt world, showing renewed interest in high-yield government bonds that have become more attractive due to recent price drops fueled by trade-related uncertainty.

‍

As volatility rises from renewed tariff tensions, some asset managers are seeing opportunity rather than danger, suggesting that fears over sovereign defaults have been exaggerated.

‍

Money management firms such as Ninety One UK Ltd., Vontobel Asset Management, and TCW Group Inc. are among those taking advantage of lower prices. They argue that yields in some distressed markets have risen to levels that now adequately compensate for the perceived risks, particularly as broader indicators of credit risk have remained relatively stable.

‍

For instance, in April, the risk premium—or spread—on dollar-denominated junk-rated bonds from emerging markets widened by 37 basis points to 634 basis points over comparable U.S. Treasuries. However, credit-default swaps, which serve as insurance against government defaults, have not reflected the same level of concern, remaining well below the panic levels reached during the 2022–2023 debt crisis.

‍

Carlos de Sousa, a portfolio manager at Vontobel, said his team was prepared to reenter the market during the recent downturn. He added that prior to the selloff, their portfolio had a conservative tilt toward higher-rated sovereign debt, but they began buying lower-rated bonds from countries such as Ivory Coast and Benin once the price dislocations became attractive.

‍

Although trade tensions and fears of a U.S. economic slowdown still loom, this cautious but deliberate shift into riskier assets signals that many investors believe the most disruptive phase of former President Donald Trump’s global trade war may be behind them. These investors are gradually adjusting their strategies, leaning into risk with the belief that some of the weakest economies can withstand the pressure and deliver outsized returns.

‍

This renewed interest in high-yield emerging-market bonds is still modest but appears to be gaining traction. JPMorgan Chase & Co., in a recent investor survey conducted during the International Monetary Fund (IMF) and World Bank spring meetings in Washington, noted a growing appetite for higher-yielding instruments. That enthusiasm is rooted in past performance—these bonds have often been among the most profitable investments in the emerging-market space.

‍

In 2024, several of these notes generated triple-digit returns. However, performance has cooled in 2025 as investors rushed to lock in profits ahead of Trump’s tariff announcements.

‍

A Bloomberg index tracking high-yield emerging-market dollar bonds has risen about 1% so far this year. That lags behind the nearly 3% return from an index of investment-grade bonds in the same category. Since Trump unveiled his updated tariff strategy on April 2, bond spreads have widened for countries such as Egypt, Ivory Coast, Benin, and Senegal, reflecting renewed uncertainty.

‍

Still, some concerns have eased. According to de Sousa, recent comments from U.S. Treasury Secretary Scott Bessent helped calm markets. Bessent reaffirmed that the U.S. remains committed to international institutions like the IMF and World Bank, despite calling for some reforms. These remarks were interpreted positively by investors, who feared that the Trump administration might reduce American engagement with such institutions.

‍

At Ninety One, portfolio manager Thys Louw emphasized that multilateral and bilateral institutions continue to play a vital role in supporting developing countries. He also noted that some nations are finding new ways to finance themselves, helping reduce dependence on traditional lenders.

‍

Louw remains optimistic about the long-term value of high-yield bonds in countries like Egypt, Senegal, and Ivory Coast, where he sees improving fundamentals and ongoing reform momentum.

‍

Meanwhile, TCW Group, which manages the $3.5 billion Emerging Markets Income fund, told clients that even though a global slowdown could push spreads wider, they see attractive opportunities. The firm believes that default risks in some segments of the market are overstated, creating value for selective investors.

‍

London hedge fund Frontier Road Limited echoed that sentiment in a client note dated April 14. The firm suggested that emerging-market bonds remain an appealing alternative to U.S. tech stocks, coining the acronym “TAMA”—short for “there are many alternatives.”

‍

Portfolio manager Martin Bercetche highlighted countries like Nigeria and Egypt, where bond spreads have expanded despite relatively small trade exposure to the U.S.—less than $6 billion combined in exports. He sees this mismatch as a chance to benefit from irrational market reactions.

‍

Overall, a growing number of investors are betting that some of the weakest links in the emerging-market chain may actually prove more resilient than expected, presenting opportunities for savvy players willing to embrace the risk.

‍