Perhaps the most famous bonds in the world right now - deeply-distressed paper issued by Venezuela's PDVSA state oil complex - are a flavor, albeit unusual one, of EM corporates. But re-ignition for the space has been en thrall for some time, and lately, investors are looking at both ends of the tenor spectrum.
Short-duration emerging market (EM) corporate bonds are re-entering institutional conversations as investors assess how to generate attractive income without full duration risk.
In a recent note, Barings' Investment Institute argued that the short end of EM corporate credit offers a rare combination of elevated carry, muted rate sensitivity, and portfolio flexibility at a point when global monetary policy remains asymmetric and politically constrained. Investors can go short and still be compensated—provided credit selection is disciplined and diversification is intentional, says Omotunde Lawal, author of the research and the investment house's Head of EMEA Corporate Credit & EM Corporate Debt.
At a structural level, EM corporate balance sheets have improved over the past decade as issuers have refinanced aggressively, extended maturities, and reduced near-term refinancing risk. Yields in EM corporate high yield, even at shorter maturities, remain meaningfully above developed-market equivalents. The spread is not solely a reflection of deteriorating fundamentals but, the note argues, persistent risk premia attached to EM assets—premia that short-duration strategies aim to harvest without taking on excessive convexity risk.
“Even after recent spread compression, EM corporates continue to offer yield levels that compare favorably with developed-market credit, particularly at the front end of the curve," Lawal says.
Barings' research shows EM corporates have delivered robust returns— typically between 8% and 22%—over the one- to three-year period following the Fed’s policy rate peak—which continues to track since the latest Fed peak in 2023, with 21% total returns delivered through October 2025.
"Looking ahead, we expect this cycle to continue presenting further opportunities for compelling, risk-adjusted returns. History also shows that EM short-dated corporate debt has offered attractive returns over time compared to similar duration U.S. Treasuries. This makes the asset class compelling, especially for investors concerned by U.S. Treasury volatility and the potential impact on returns," she says.
Stronger liquidity and flexibility are often understated advantages. Short-dated EM corporate bonds tend to trade more frequently than longer-tenor paper, particularly in hard-currency markets. This can be critical during periods of stress, when exit optionality matters as much as yield.
Default risk remains issuer-specific, and in EM, governance quality and sovereign linkages can still dominate outcomes. Barings stresses that duration compression shifts risk from macro rates to idiosyncratic credit events, reinforcing the need for active management rather than passive exposure. “Short duration reduces rate risk, but it does not replace the need for fundamental credit analysis—issuer selection remains the primary driver of outcomes," says Lawal.
From a portfolio-construction perspective, most strategies in the space emphasize hard-currency exposure, typically in dollars, to avoid layering FX volatility on top of credit risk. Geographic diversification—across Asia, Latin America, and select frontier markets—is also essential, as EM corporates remain highly sensitive to domestic policy shifts and sovereign balance-sheet dynamics.
If global rates fall sharply, short-duration portfolios will lag longer-duration credit, but many investors, Barings says, will forgo absolute return potential in exchange for carry stability in the current environment. All of these elements, at the bottom line, add up to mis-pricing on the shorter end.
"On average, EM corporates carry higher or equivalent standalone credit ratings than their sovereign counterparts, particularly among large IG issuers. This evolution in quality and risk management is not fully reflected in current valuations—creating a structural opportunity for investors. Active managers can exploit this divergence between perception and reality, capturing a premium that should converge toward fair value as markets recognize the asset class’s transformation." Lawal says.
"In short, EM corporate debt offers 15–100 basis points (bps) of incremental yield versus DM corporates with little to no extra credit risk."
