By Florian Schmidt, Director, Frontier Strategies Pte Ltd

2025 in Review: A Strong Year for EM and Frontier Sovereign Bonds

US dollar-denominated sovereign bonds from emerging and frontier markets remained a compelling asset class in 2025. The JP Morgan EMBI Global Diversified Index delivered a remarkable 10.7% return, outpacing 2024’s more modest 6.5% gain. This strong performance was driven by a mix of easing global monetary policy, supportive technical factors, and idiosyncratic rallies in select countries. 

Global interest rates stabilized or declined, particularly after Federal Reserve rate cuts, which boosted the carry on EM sovereign debt. Easing U.S. Treasury yields further supported valuations, with some bonds offering yields of 7–8%. Risk appetite improved, tightening spreads for higher-risk sovereigns, while country-specific developments drove some of the largest gains.

Several standout stories defined 2025. Bolivia’s dollar bonds soared over 50% following the election of centrist Rodrigo Paz and the negotiation of more than $9 billion in multilateral financing. Ecuador experienced a similar surge, with dollar bonds up over 43% after President Daniel Noboa secured a full term and an expanded IMF facility. In Africa Egypt, Nigeria and Zambia and in Asia Pakistan, Sri Lanka and the Maldives all saw double-digit gains, reflecting a combination of IMF support, debt restructuring, and favorable commodity price movements. Other EM and frontier market issuers like Belarus and Colombia benefited from a “search for yield” among investors, pushing their bonds to strong returns.

Mongolia’s Sovereign Bonds: Outperformance and Strong Investor Demand

Mongolia stood out in 2025 as a frontier market success story. The country issued a $500 million five-year sovereign bond at 222bps over U.S. Treasuries, marking the tightest spread in its history. Secondary markets show yields on short-dated bonds compressing to 5–6%, while longer-dated maturities traded slightly above par, reflecting robust demand and improved risk perception. Oversubscription levels reached 7.8x, demonstrating strong institutional appetite and confidence in Mongolia’s fiscal trajectory. 

This performance was underpinned by multiple credit rating upgrades in 2024–2025, fiscal improvements, prudent debt management, and an active liability management strategy that extended debt duration and reduced rollover risk. Strong exports, rising FX reserves, and disciplined fiscal policy further reinforced investor confidence, highlighting the country’s growing appeal in global frontier debt markets.

Quasi-sovereign and corporate issuers also benefited from this supportive backdrop. Bonds from DBM and other quasi-sovereigns experienced strong secondary demand, while corporate bonds such as Golomt Bank 2027 tightened significantly despite yields remaining above 8%. Smaller banks, including State Bank and M-Bank, successfully issued sub-benchmark transactions, signaling deeper market access and a broader investor base.

 Looking Ahead: EM and Frontier Bonds in 2026

Entering 2026, emerging market sovereign debt continues to offer a compelling opportunity, though conditions are nuanced. Asset managers remain constructive, drawn by high carry, selective spread tightening, and easing net issuance. Absolute returns are likely to be driven by carry, with limited room for further compression given that many countries, including Mongolia, already trade at historically tight spreads. Base-case projections suggest total returns of 5–6%, while a more bullish scenario—combining Fed easing, a weaker dollar, and strong inflows—could push returns closer to 10%. Conversely, sustained high interest rates and a strong dollar could reduce returns to around 2%.

Structural reforms, constructive IMF cooperation, and improving fundamentals in select countries could continue to support sovereign spreads. Latin America and Africa remain areas of opportunity, with countries such as Argentina, Ecuador, and Nigeria showing potential for credit improvements and spread convergence. Venezuela defaulted debt could continue to rise in case of a regime change and the commencement of debt restructuring talks. Conversely, political uncertainty, rate volatility, FX fluctuations, and geopolitical shocks remain the principal risks across EM and frontier markets.

Mongolia in 2026: Carry and Confidence

Mongolia enters 2026 with tight yields and strong investor demand. The country’s stable macro backdrop, coupled with prudent fiscal and debt management, supports a return profile combining carry with modest price appreciation.

Investors will closely watch key factors including commodity exposures—especially copper and rare earth prices—diversification away from Chinese demand, and growth in renewables and AI-driven sectors. Near-term debt maturities, with $1.83 billion due in 2027 and $1.24 billion in 2028, suggest the potential for early liability management. Parliamentary approval to issue up to $1 billion in sovereign international bonds in 2026 provides further flexibility. Following sovereign benchmarks, smaller financial; institutions and corporate issuers may also debut, similar to M-Bank and State Bank in 2025. In 2026, EM and frontier markets—Mongolia in particular—continue to offer an attractive combination of carry, modest price appreciation potential, and growing investor confidence, while remaining exposed to macroeconomic, political, and commodity-related risks. For global investors seeking frontier market opportunities, Mongolia exemplifies a market that blends yield, stability, and strategic growth potential.

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