The JP Morgan GBI-EM Global Diversified Index (EMD) has risen by 6.0 percent in Swiss francs since January 2026, while the currency-hedged FTSE World Government Bond Index excluding Switzerland (global government bonds) has lost 4.7 percent. The gap of over ten percentage points is primarily attributable to differences in interest rate trends, interest income and currency effects.

Figure 1: Different performances across bond markets

Higher interest income benefits emerging market bonds

Interest rate levels differ significantly. The yield to maturity on the GBI-EM GD ended September at around 6.5 percent. This higher current income provides a certain buffer against price losses when market interest rates rise. In the first nine months of 2026, interest income of 4.4 percent compared with price losses of 2.2 percent.

Yields on government bonds from developed countries also climbed. Persistent inflation risks, growing budget deficits and high government borrowing requirements had a particularly negative impact on longer-term bonds. In the third quarter, yields rose significantly faster in developed countries than in emerging markets. Lower current interest income had less of a mitigating effect on the resulting price losses.

Currency trends widen the gap

Currency movements were another key driver of yield. While foreign-currency risks in the FTSE WGBI are hedged against the Swiss franc, local-currency bonds from emerging markets are unhedged.

This difference is particularly evident in the current year: in US dollars, the GBI-EM GD generated a return of just 0.6 percent, while achieving 6.0 percent in Swiss francs. Although, overall, the emerging market currencies on the index depreciated slightly against the US dollar, the appreciation of the US dollar against the Swiss franc led to a significant positive currency effect. This effect may be reversed if the franc appreciates.

Figure 2:  Yield drivers and active return – emerging markets debt in local currency
January – September 2026, in %

Different risks offer potential for diversification

Better performance does not mean that the risks associated with the two asset classes have converged. Emerging market debt is more dependent on country-specific developments, political risks and exchange rate fluctuations. Furthermore, the credit quality diverges significantly from traditional developed countries’ government bonds, as illustrated in Figure 3.

Figure 3: Debtor categories by rating

However, it is precisely these differing risk factors that can contribute to the diversification of a bond portfolio. Recent developments have shown that the interest rate and currency markets in emerging economies do not necessarily move in line with those in developed countries.

Active management boosts yield drivers

The investment group is actively managed by Mondrian Investment Partners. Country selection is based on expected real interest rates, i.e. after deducting the forecast inflation rate  and taking credit quality into account. Currency allocation focuses on purchasing power considerations. This results in a concentrated portfolio weighted towards countries with high real interest rates, such as Mexico, Brazil and Colombia. In the first nine months of 2026, the investment group achieved a return of 9.9 percent after costs, compared with 6.0 per cent for the benchmark index.

However, diverging from the index can also have a negative impact, as was the case in 2024, when the investment group lagged behind the index at 3.2 percent.

As a result, emerging market debt remains a complement to traditional government bonds, with higher interest income and other separate yield drivers offering diversification potential through exposure to a different mix of currency, credit and country risks.