Blurred lines

Read this article to understand:

• Why a sovereign and rates view is increasingly vital for credit investing
• How the boundaries between emerging and developed markets are fading
• The value of cross-team collaboration and shared perspectives

The lines between traditional asset class boundaries are blurring as macroeconomic policy and market dynamics converge. And data, events, and assets, once considered peripheral, are now influencing portfolio returns. Some may introduce risk, while others offer meaningful upside. This overlap is making emerging market (EM) debt and credit an increasingly attractive option for developed market (DM) investors.

For instance, EM primary issuance continues to attract global interest. Sovereign bonds from countries like Chile and Poland now rival similarly rated DM peers, appealing to buy-and-maintain allocators. Meanwhile, Qatar and Kuwait’s reclassification as developed markets removes them from J.P. Morgan’s EM sovereign indices. At the other end of the spectrum, distressed-debt investors have benefitted from restructurings in select EMs, drawn by the potential for fundamental recoveries and outsized returns. Increasingly, EM assets are gaining traction among traditionally DM-focused investors.

Investment grade (IG) and high yield (HY) markets are also converging. The constant churn of rising stars and fallen angels is blurring the lines between these categories. Investors are pushing boundaries, seeking diversification and new sources of value – even within mandate constraints.

Credit markets are now more macro-driven than ever. Inflation, rate volatility, and fiscal policy affect all asset classes. For example, tariffs are a universal concern. IG managers benefit from input not only from rates specialists but also EM colleagues. HY and EM share many characteristics and risks, making information exchange between teams increasingly valuable.

The importance of a sovereign view

Incorporating a sovereign and rates perspective is becoming essential in credit investing.

When credit spreads are tight, interest rates contribute significantly to yield. When rates rise – as recently seen across the US and UK – spread dynamics shift. Central bank moves affect more than just government bonds: IG spreads adjust, refinancing windows open or close, and credit curves reshape. Not having a forward-looking view on rates can mean missed opportunities.

For example, as of August 2025, we believe the premium building in certain government bond yields might be distorting the valuation picture for credit. As a result, at current levels, we think corporates continue to look fair rather than rich. Concerns over the creditworthiness of some western governments lead us to rely more on metrics, such as swap spreads, to value corporate risk, rather than spread to government. This better removes the growing credit risk creeping into government bond yields and provides a pure credit valuation. But seeing this requires having a sovereign view.

Conversely, widening IG spreads may signal recession risks, influencing rate positioning. This interdependence highlights the limitations of siloed analysis. Treating rates and credit separately can lead to information gaps, suboptimal risk management, and missed alpha. Yet many asset managers still separate these functions.

A sovereign view, long central to EM corporate credit, is now critical in DM contexts too – such as Italy, Spain, and even the UK – as DM markets now face similar challenges to EM, from debt sustainability to limited fiscal headroom and protectionism. It’s no longer sufficient to assess rates in isolation; country-level insights must be integrated. Cross-team collaboration is reshaping how credits are valued and is a key driver of EM-DM convergence.

Emerging and developed markets are converging

In the past, EM debt might have been described as an idiosyncratically driven asset class. But global integration, the convergence of fundamental positions, and the rise of overlapping risk factors have driven the correlation between EM and DM assets higher.

As discussed above, investors in both asset classes are impacted by the same macroeconomic risks. The credit quality of the EM universe has also improved steadily since the early 2000s. And whereas DMs used to be systematically bigger and more effective economies, with more firepower than EMs, some EMs have now reversed this situation. With DM economies facing ongoing challenges while structural factors continue to improve across EM, we also expect further convergence between the two (see Figure 1). 

Meanwhile, in the corporate universe, more issuers are present in both EM and DM indices. This is the case for a diverse cohort of firms and sectors such as Mexican telecoms firm America Movil, Israeli pharmaceutical firm Teva, Luxembourg telecoms specialist Altice, or Macau’s gaming sector. From a research perspective, this has created a growing area of crossover, as these names are relevant to both DM and EM investors, with the same names held in different strategies.

Investors are also increasingly able to benefit from individual ideas where the boundaries are blurred. In the financial sector, BBVA Mexico is a good example. As a key and strongly performing subsidiary of the wider BBVA Group, it offers a significant premium for the bonds it issues directly. Given the underlying fundamental position, we feel this is unjustified.

Similarly, EM more clearly requires the management of political volatility, and awareness of political dynamics and their impact on the economy is natural within the universe. Yet DMs are becoming more impacted by political factors. DM-domiciled companies are also becoming more global, meaning investors need to better understand their operating environments. BBVA Group is again a good example, as it is a DM issuer headquartered in Spain, but with Mexico contributing 54 per cent of its net income.

Although the convergence is ongoing, there are also ways in which the asset classes continue to differ. There too, collaboration can give investment desks the ability to learn from each other and assess a broader range of material factors.

For instance, the idiosyncratic events that typically impact EMs are more often having global effects, including on DM investors. For example, the Chinese property collapse led to defaults and credit losses almost entirely confined to Asia. But its impact on China’s overall economy went well beyond the EM universe. An understanding of the Chinese property sector was therefore a key input to a China view that remains an important global theme.

And in Europe, the situation in Ukraine continues to have a major impact. Recent developments directly affected fiscal risks and borrowing requirements, sending DM and EM worlds colliding, with a significant impact on the pricing and outlook of fixed income markets.

Yet most investors still treat and position DM and EM universes separately. In our view, the asset classes should be joined, through ongoing collaborative exchanges between investment desks.

Cross-pollination for a richer harvest

As rates and credit become more intertwined, and EM and DM converge, integrated teams can better manage downside risk and seize opportunities.

Sharing information across asset classes enables teams to factor in forward-looking views. It also opens access to a broader credit universe, enriching portfolios with off-benchmark ideas.

DM processes offer scale, data-driven rigour, and structured sector inputs. EM teams can adopt these practices to build more robust frameworks. Cross-asset collaboration brings together complementary skills, fostering innovation and dynamic portfolio management.

By combining IG, HY, EM, and DM perspectives, investors can unlock high-return ideas, improve risk-adjusted outcomes, and enhance idea generation. This is more than operational efficiency: it’s a mindset shift. Breaking down silos doesn’t just improve collaboration; it opens new pathways to performance in an increasingly interconnected world.