Please see the below article from EPIC Investment Partners detailing their discussions on the emerging-market bond landscape. Received this morning 31/10/2025.
The emerging-market bond landscape harbours a distortion so large it hides in plain sight. Nearly two-thirds of the USD-denominated universe now trades with spreads below 150 basis points (bps), with one in six below 50 bps. Some of this reflects genuine progress—Qatar, for instance, has earned its place among near-developed credits—but much of it is mechanical, not merit-based.
JPMorgan’s EMBI Global Diversified (EMBIGD), the benchmark dominating EM debt investing, was built on a sound premise: limit each issuer to twice the index country average to avoid concentration risk. Yet this safeguard has become a machine for mispricing, channelling passive capital not to the best credits, but to the smallest. In this world, allocation is determined not by fiscal strength or market depth, but by a spreadsheet formula.
The absurdity is clearest when comparing Mexico and the Dominican Republic. Mexico’s economy, at roughly US$1.8 trillion, is fourteen times larger than the Dominican Republic’s US$126 billion, and its bond market vastly deeper. Yet both sit almost side by side in the benchmark: about 3.8% for Mexico and 3.5% for the Dominican Republic. A Latin American heavyweight and a lower-rated Caribbean island command near-equal access to global passive capital. This is distortion masquerading as diversification.
The consequences are tangible. Capped giants like Mexico face a structural overhang—index capital cannot fully absorb their issuance—while smaller, uncapped names see their spreads crushed to unsustainable levels. This week, the BB-rated Dominican Republic sold a new 10-year bond at 177 bps over Treasuries, while Mexico’s state-owned utility CFE (rated BBB) trades wider at 204 bps. Why purchase the weaker credit at a tighter spread? The correlation to the index is 85%, so even the diversification argument fails.
Stress only magnifies the irony. When risk aversion hits, passive funds are forced to dump the same small credits simultaneously. Liquidity evaporates precisely where it is most needed, punishing investors who mistook benchmark exposure for safety. Larger, capped issuers such as Mexico remain tradable, preserving price discovery and resilience. In downturns, the illusion of diversification turns into a liquidity trap.
What starts as an index rule ends as an investment philosophy. When scarcity, not solvency, drives allocation, markets cease to price risk and begin to simply replicate it. Benchmarks no longer measure reality—they manufacture it.
Our models are explicitly designed to avoid this trap, bypassing the fiction of benchmark parity to seek genuine value. Ultimately, the choice for investors is stark: trust an index that rewards scarcity over solvency, or trust the simple arithmetic of value. Because when a BB borrower yields 5.875% and a BBB borrower offers 6.1%, the maths, not the marketing, reveals where prudence and opportunity truly lie.
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Alex Clare
31/10/2025