There is No Emerging Market Scaring from the Effects of the Trade War on Dollar Debt

The ongoing trade war is leaving no emerging market unscathed, as sovereign and corporate bonds denominated in U.S. dollars have faced widespread losses across the board. So far in April, every country within the emerging-market landscape has seen its dollar bonds decline in value, underscoring the depth and breadth of investor anxiety caused by escalating global trade tensions.

‍

Data compiled by Bloomberg reveals that sovereign dollar debt from seven lower-rated countries — including Maldives, Sri Lanka, Gabon, and Zambia — have plunged by more than 10% in just the first nine days of the month.

‍

On average, emerging-market sovereign dollar bonds have fallen by 2.9% as of April 9. These figures illustrate the heightened pressure on riskier debt amid uncertainty over tariff policies and their economic fallout.

‍

The situation is no better in the corporate bond market. Like sovereign debt, dollar-denominated corporate bonds issued across all emerging markets have turned negative for the month. The average decline in corporate credit stands at 2.6%, effectively wiping out nearly all the gains made earlier in 2025.

‍

These losses reflect both the direct impact of tariffs on trade-reliant companies and the broader market sell-off triggered by fears of sustained economic disruption.

‍

Even though stock markets responded positively to a midweek decision by U.S. President Donald Trump to temporarily pause some planned tariffs, that optimism did not extend to emerging-market bonds. On the same day the tariffs were paused, EM sovereign dollar bonds still closed 0.6% lower.

‍

This suggests that investors remain deeply cautious, needing more than a short-term reprieve to regain confidence. Their focus has shifted to the longer-term implications of the trade war — particularly the inflationary pressures from higher tariffs and the risk of permanent damage to global supply chains.

‍

As a result of the latest selloff, yields on EM sovereign dollar bonds surged to 7.38%, their highest point since August. That level is also 80 basis points above the five-year average, highlighting how much extra compensation investors are now demanding to hold riskier emerging-market debt in the face of global uncertainty.

‍

Interestingly, despite being the central focus of Trump’s tariff escalations, China’s sovereign dollar bonds held up relatively well. According to Bloomberg data, China’s sovereign dollar debt has recorded only a modest 0.5% loss so far this month, making it one of the strongest performers among emerging markets. This resilience may be due to the perception of China’s deeper financial buffers, policy flexibility, and greater market stability compared to smaller, more vulnerable countries.

‍

On the corporate side, Ukrainian companies have delivered some of the best returns in 2025, thanks largely to strong performances from major issuers. Steelmaker Metinvest BV and poultry producer MHP SE have each managed to maintain an average gain of around 7% for the year, even after taking a hit in April. These companies’ resilience suggests that certain sectors and issuers with strong fundamentals can still perform well despite the broader downturn.

‍

The broader picture, however, remains troubling for emerging markets. The synchronized downturn across sovereign and corporate debt markets reflects deep-rooted fears over a deteriorating trade environment and rising financing costs. For many countries and companies, access to affordable U.S. dollar funding is essential — and as yields climb and investors retreat, refinancing risks and fiscal pressures are growing.

‍

Analysts warn that unless there is a significant easing of geopolitical tensions or a major policy shift that stabilizes investor sentiment, emerging markets may continue to face intense volatility. In particular, junk-rated sovereigns are seen as especially vulnerable due to their higher debt burdens and limited fiscal flexibility. Countries like Zambia and Sri Lanka are already contending with debt restructuring efforts, and further stress could push more nations toward similar scenarios.

‍

While some isolated bright spots like China and Ukraine offer a bit of reassurance, the general trend points to a challenging period ahead for emerging-market debt. With global trade relationships being redrawn and inflationary risks rising, the road to recovery in these markets is likely to be bumpy. For now, the losses logged so far in April are a stark reminder of how quickly sentiment can sour in a fragile global financial environment.

‍