Investors boost emerging market debt performance globally; Angola bonds >8% yield

Emerging market debt remains resilient as uncertainty tests markets

Strong investor demand is helping performance overall, while divergence continues between commodity-exporting economies and those exposed to oil supply disruption.

Despite the recent mild correction, emerging markets debt (EMD) continues to demonstrate resilience amid exceptionally uncertain global macroeconomic, monetary and geopolitical backdrops. This resilience is reflected in the sustained inflows into the asset class, as shown in the chart below. Improving demand from foreign investors has helped maintain the strong outperformance recorded over the past three years. This favourable performance trajectory has also remained firmly in place despite recent renewed upward pressure on developed market bond yields.

Emerging market debt fund flows ($ billion)

Source: JP Morgan; Schroders – 24 July 2026

Another defining feature of this year’s EMD performance has been its continued dispersion , particularly within the local currency debt sector. Against an exceptionally uncertain geopolitical backdrop, high-yielding markets in commodity-exporting economies, notably in Latin America, have unsurprisingly continued to outperform, with the region’s GBI-EM Global Diversified index returning +12.6% year-to-date. By contrast, lower yielding markets in countries with greater exposure to disruptions in oil flows through the Strait of Hormuz have lagged. This divergence is reflected in the Asian and European components of the local debt index, which have returned -2.6% and -0.9%, respectively on a year-to-date basis.

In hard currency debt, although spreads remain historically tight and dispersion in bond performance less significant of late, we continue to identify improving sovereign fundamentals that can generate attractive risk-adjusted returns. Angola is a notable example: bonds in the belly of the curve yield more than 8%, and remain supported by twin surpluses, a declining debt burden, an improving debt profile, and efforts to diversify growth through the Lobito Corridor, backed by bilateral financing from Western partners.

While this positive longer-term trajectory remains firmly intact across several emerging market local and hard currency debt markets, July saw a moderate correction as a few headwinds resurfaced. Investors were unsettled by renewed oil-driven inflation concerns, a resilient US dollar and the monetary policy uncertainties generated by the new framework and communication style that the new Fed chair is attempting to implement. The ongoing EMD correction was further exacerbated by concerns over potential policy missteps in emerging markets after the central banks of Indonesia and South Africa refrained from delivering the rate increases widely anticipated at their July monetary policy meetings.

Indonesia has particularly remained under intense market scrutiny, as reflected in the significant underperformance of its local currency debt market over the past 12 months (see below). We have long been cautious about the country’s erratic policymaking and deteriorating fiscal position, and we continue to see little evidence of a credible and sustained effort to restore investor confidence. Tactical opportunities may nevertheless arise, given that the rupiah appears extremely undervalued, oversold and under-owned. A more decisive reallocation to Indonesia would require a clear shift in policy direction. The appointment of a credible and possibly technocratic economic team capable of arresting the deterioration and rebuilding confidence remains an essential first step for us to turn constructive again on Indonesian bonds and currency that we have been avoiding over the last 12 months.

GBI EM Global Diversified: overall index vs. Indonesia (rebased to 100 July 2023)

Source: Bloomberg; JP Morgan; Schroders – 24 July 2026

With the notable exception of Indonesia, we maintain our positive views on the fundamentals and policy direction of most other major emerging market economies. Many continue to benefit from resilient growth, substantial macroeconomic and valuation buffers, and high real interest rates. Contrary to an increasingly widespread market view, we expect current global inflation concerns to fade, as they largely reflect what may prove to be a temporary energy supply shock. Below, we provide a brief update on the global and EM inflation outlooks.

The global and EM inflation cycles

Over the past two years, the global economy has steadily moved away from the inflationary extremes of 2021–23. Covid-era supply chain disruptions have normalised, the pandemic driven surge in goods demand has faded, and restrictive monetary policy, though implemented very late, ultimately prevented both developed and emerging economies from overheating. That disinflationary process is now facing its first meaningful test from the ongoing energy supply shock. The key question is whether this will prove to be a temporary interruption or leave a more persistent inflationary imprint.

The chart below shows that the short-term global inflation cycle has moved into the “pressures” phase, defined in our model as inflation expectations being above target and rising. This is not confined to one region. The US, the euro area and Japan are all in the pressures phase, while a substantial number of emerging economies are in the same position.

Stages of the inflation cycle by country

Source: Schroders – July 2026

That should make central banks more cautious. Recent rate cuts may be reversed, terminal rate expectations may be revised higher and inflation volatility is likely to increase. The market is already well advanced in re-pricing these dynamics. But an interruption to the disinflation trend of the last two years is not necessarily the beginning of another self-sustaining inflation wave that is starting to worry market participants. Energy can raise the price level and reduce household purchasing power, but persistent inflation requires this initial energy shock to spread into wages, services, expectations, excessive credit and money creation. Unlike in 2021-2023 period, we are not seeing convincing evidence of these generalised inflationary pressures so far in any major developed or EM economy.

We anticipated the unusually powerful nature of the 2021-23 inflation surge because several shocks occurred simultaneously. The energy shock was accompanied by broad supply-chain disruption and an exceptional post-Covid demand expansion. Household balance sheets had been supported by exceptional fiscal transfers financed by excessive money creation. Monetary policy was extraordinarily lax with real interest rates in deeply negative territory.

Supply constraints therefore collided with an economy that had both the willingness and the financial capacity to spend. The resulting inflation was not simply a change in relative energy prices; it became a broad nominal-demand shock that ultimately required a prolonged and aggressive monetary policy response.

Conditions are materially different today

Policy is already restrictive, real bond yields are positive in most markets and the bond vigilante is alive and well. This contrast is captured by figure 4, which compares the stages of the inflation cycle and bond market pricing in June 2026 with January 2022. At the beginning of 2022, many countries experiencing inflation pressure had negative bond valuation scores in our screening model. Inflation risks were building, but markets were still offering inadequate compensation for it. Most markets were at that time categorised in the inflation “complacency regime”, as highlighted in the quadrant analysis presented in figure 4.

By June 2026, the picture had reversed. Most economies in the pressures phase now have positive bond valuation scores and had migrated into the “vigilante regime.” Investors are now enjoying materially more compensation for inflation, fiscal risk and duration exposure.

Inflation and market regimes: 2022 vs. 2026

Source: Schroders; Bloomberg; LSEG Data & Analytics, – June 2026

The implication of this regime shift is clear: the system has now a much larger real yield and valuation buffer than it did in early 2022. Higher real borrowing costs restrain demand, discourage excess leverage and make it harder for a supply shock to become a generalised overheating cycle.

There is, of course, a cost. Restrictive real rates can deepen the growth damage caused by higher energy prices. Yet that growth restraint is also what reduces the likelihood of a wage price spiral. In 2021–22, bond market complacency amplified the inflation problem. Today, the vigilantes are already doing part of the central banks’ work, as recognised by Kevin Warsh at this time of writing.

Global money growth points to moderate activity, not overheating

Monetary evidence provides the strongest argument against an imminent, disruptive inflation wave. Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” has always been a useful framework for us. An energy shock can temporarily raise headline inflation, but sustained economy wide inflation normally requires monetary and credit conditions that validate and propagate the initial rise in prices.

Figure 5 shows that global real broad money growth has recovered strongly from its recent contraction and is now around its long-term average. At roughly 3–4%, it is sufficiently positive to support nominal activity, corporate revenues and financial markets.

But current money growth is not excessive. It remains far below the double-digit rate reached at the March 2021 “peak liquidity” point and below the extraordinary monetary expansion associated with the 1970s. There is no evidence that the world economy is currently being flooded with the excess purchasing power normally associated with a sustained overheating cycle.

Global real money growth (% year-on-year)

Source: Bloomberg, Schroders – 29 May 2026

The absence of current monetary excess does not preclude another major inflationary wave. We actually maintain our long-term view that a third wave remains a distinct possibility, although the conditions for it have not yet materialised. In our view, this third wave would ultimately be triggered and sustained by future fiscal dislocations.

Figure 6 makes the possible analogy between the current inflation experience and the three successive US inflation waves of the 1970s. The first wave was followed by a larger second surge and, ultimately, by a third and more destabilising peak around 1980. In the current cycle, figure 6 identifies a modest pre-pandemic first wave, the much larger 2021–22 second wave and the possibility of a future third wave. This analogy should be treated as a risk scenario rather than a mechanical forecast.

The three waves of inflation?

Source: Schroders, Bloomberg – June 2026

The more plausible transmission mechanism for this possible third wave to occur is a renewed and unequivocal fiscal dominance. Developed market governments face large and increasingly difficult public debt burdens. For the moment, bond market vigilantes are still attempting to enforce discipline by demanding higher yields and larger risk premia.

The political tolerance for that market-imposed discipline will likely be tested during the next prolonged economic slowdown. A downturn would weaken tax revenues, increase automatic spending and generate pressure for large scale fiscal support. At the same time, higher debt service costs could make conventional deficit financing increasingly difficult. Extraordinary large and continuous money printing will be required. It is at that point that the next wave of inflation will be more difficult to manage for policy makers and market participants. An extremely defensive exposure will be required as we approach that point for deve