World's Riskiest EM Bonds in Play as Distressed Makes a Comeback

The riskiest bond trade in emerging markets is mounting a comeback, offering double-digit returns to those brave enough to flirt with default.

A rebound in distressed government bonds is helping emerging-market dollar debt to its best start since 2019. All but one of the 10 best-performing developing-economy bonds are in distress — from Bitcoin-touting El Salvador to pandemic-era defaulter Zambia, to serial bailout recipient Argentina.

The rally is, in part, due to prices recovering from rock-bottom levels last year when traders were overly pessimistic about recovery expectations. But it’s also a reflection of how investors pivoted toward riskier investments at the start of the year, driving up assets across financial markets.

While the shift in sentiment may turn out to be temporary, for now it’s a welcome change for the small universe of buyers of distressed securities — a high-risk, high-reward trade in bonds that yield at least 10 percentage points above US Treasuries.

“Distressed countries are among those in the asset class with the most upside potential,” said Carl Ross, partner and sovereign credit analyst at Grantham, Mayo, Van Otterloo & Co. in Boston, which counts distressed Tunisian bonds among its top picks in emerging markets.