Short-Duration emerging market hard currency debt: How can I target income while limiting credit and interest rate risk?

Why Neuberger Berman sees an opportunity for investors seeking income while keeping duration low and potentially eliminating foreign exchange risk

Only a decade ago, emerging market debt carried a negative reputation among investors - potential for higher yields, but at the cost of currency volatility (for local currency-denominated debt), political and geopolitical risks. Many investors who had navigated the Asian financial crisis of 1997-1998, the commodity busts, and the capital flow reversals of the mid-2010s came to the conclusion that the return wasn't worth the risk. Allocations to emerging market debt shrank as capital flowed toward developed-market alternatives.

But emerging markets have been evolving. Credit fundamentals are improving. Many sovereigns have undertaken structural reforms, improved fiscal discipline, and increased hard currency reserves. And, critically, yields across all fixed income markets have risen, making the asset class more attractive.  

We spoke to Madeline Ho, Head of Intermediary, Singapore and Southeast Asia, and Tobias Bracey, Senior Vice President, at Neuberger to hear from them on their perspective on how emerging market debt has evolved as an asset class, why the narrative around emerging market risk has shifted, and what opportunities exist for income-focused investors today.

Emerging Markets Have Matured

The evolution of emerging markets as a credit asset class has been underappreciated. The narrative—that emerging market debt is inherently crisis-prone—was forged in the 1990s and early 2000s, when currency crises, sudden capital stops, and contagion were genuine risks. That world still exists at the margins, but the core of the investable emerging market debt universe has transformed.

Consider the fundamentals. Emerging markets now post stronger external balances, lower debt-to-GDP ratios relative to developed markets, and more consistent policy frameworks. Many have built substantial foreign reserves. The sophistication of emerging market corporates has increased materially—these are no longer marginal issuers but genuine multinationals with global operations and competitive advantages.

The growth story has always been appealing, and lately the “convergence” theory seems to be proving correct. Emerging markets are currently  showing double the growth rates  of developed markets (*As of March 2026. Bloomberg and IMF 2026 forecasts).

In addition, default rates in emerging market debt, viewed over longer time horizons, are historically well-contained. Credit spreads have compressed, but not to the point of offering no compensation for underlying risks—particularly in the hard-currency space where there should be no foreign exchange risk.

A Vote of Confidence From Investors

The investor base has also changed. The asset class is no longer treated as a single macro trade or a bet on capital flows. Institutional allocators approach emerging market debt the way they approach any fixed income asset: through disciplined credit analysis, fundamental evaluation of repayment capacity, and active management. That shift in investor sophistication has created opportunities for managers with deep regional expertise and rigorous bottom-up capabilities.

Within emerging market debt, the Neuberger team has seen strong client interest driven by improving fundamentals and attractive income potential from the sector, particularly evident in its short duration strategy which combines limited interest rate sensitivity with high credit quality exposure.

Income Without Excessive Duration

In the years after the Global Financial Crisis, the main challenge for fixed income was low yields . After a decade of monetary accommodation, investors seeking income had to potentially increase  credit risk, or extend duration. The alternative was embracing low returns.

But as yields have grown across the fixed income spectrum, the calculus may have shifted.

Hard-currency emerging market debt now offers yields above those available in developed-market credit and government bonds. A two-year-duration emerging market bond, for instance, can now offer yields comparable to or exceeding what an investor would get from a longer-dated developed-market bond—but without the extended duration exposure or the refinancing risk of the deeper curve.

This positioning has become particularly compelling for investors uncomfortable with current duration levels. Traditional portfolio constructs—global aggregates, investment-grade credit indices—may carry meaningful duration risk in an environment where interest rates may not have completed their adjustment. Short-duration emerging market debt can offer an alternative: exposure to fundamentally sound credit, attractive carry, and measurable duration discipline.

Active Management and Risk Control

The evolution of emerging market debt as an asset class depends, ultimately, on disciplined management. Not all emerging markets are created equal. Not all issuers within emerging markets are creditworthy. And valuations, while more rational than they have been in years, can still overshoot.

Sophisticated emerging market debt managers employ a dual-lens framework: top-down macroeconomic assessment combined with granular, bottom-up credit analysis.

The top-down perspective identifies which geopolitical and policy risks are already priced into valuations, and which may be overlooked.

The bottom-up analysis determines whether individual sovereigns and corporates have the capacity and discipline to service their obligations through economic cycles.

For a portfolio invested in short-duration emerging market debt, this means preferring issuers with improving credit trajectories and sufficient near-term liquidity over those where the story is backwards-looking. It also calls for maintaining quality discipline—an investment-grade average rating, for instance—rather than chasing yield in speculative territory while spreading exposure across sovereigns, quasi-sovereigns, and corporates rather than concentrating in any single country or sector.

By also focusing on hard-currency debt denominated in dollars, it can remove currency volatility as a source of portfolio stress. Local-currency emerging market debt may have its own advantages, but hard-currency emerging market debt can eliminate one layer of noise for institutional investors whose liabilities are typically denominated in major developed-market currencies.

Investment implications

The broader fixed income world has always demanded a degree of sophistication—understanding yield curves, credit cycles, and macro dynamics. Emerging market debt is no exception. But for clients equipped with the right analytical tools and the discipline to execute active management, the opportunity is present: potential compelling income grounded in fundamentals and risk frameworks through this asset class To find out more about fixed income, read our 3 part fixed income series here on bond yield and duration, credit risk and portfolio construction.  It may offer additional clarity as to how it fits in your overall portfolio.

For investors considering emerging market debt for the first time, or reconsidering after a period of underweight positioning, short-duration emerging market debt can offer a pragmatic diversification opportunity. It is crucial that the asset class is managed by teams with regional expertise: local presence in key emerging market hubs, relationships with central banks and finance ministries, understanding of local market structure and issuer dynamics. The dispersion of opportunities and risks in emerging markets is high and it's a feature that active managers can exploit.

The Neuberger team would frame the allocation as a measured income diversifier rather than a broad emerging market risk trade. From a portfolio-construction perspective, investors may consider it as a complement to developed-market credit or global aggregate exposure, particularly for those seeking additional yield without materially extending duration.

Endowus clients can speak to our client advisor to find out more about their portfolio diversification to the Neuberger Short Duration Emerging Market
Debt Fund on Fund Smart.  

Neuberger’s years of experience

Neuberger’s Emerging Market Debt platform manages $27.5 billion in dedicated emerging market debt assets as of July 2026, operating within a broader $613 billion asset management platform supported by more than 780 investment professionals globally. Broader to that, Neuberger’s Fixed Income franchise is the largest asset class within its AUM, serving both wholesale intermediary and institutional clients for many years, reflecting a long-standing commitment in this space. Its’ expertise in this space spans a wide array of sub-asset classes, ranging from broad multisector fixed income to more specialised capabilities.

Key Risks

Short-duration hard-currency emerging market debt is not without risk. Issuers may default or be downgraded, and emerging market sovereigns and corporates can be affected by political instability, policy changes, sanctions and geopolitical events. Liquidity can deteriorate during periods of market stress and credit spreads can widen quickly. Short duration reduces, but does not eliminate, sensitivity to interest rate changes. Investors should refer to the fund’s prospectus and Product Highlights Sheet for a full description of risks.