Insurers chase $20t emerging market debt for income

US dollar corporate debt makes up $2.6t whilst sovereign debt adds $1.8t.

Emerging market debt (EMD) is becoming a more prominent option for Asia-Pacific insurers seeking higher income and capital-efficient returns.

In a new whitepaper, the asset manager said the EMD market had grown to more than $20t by the end of 2025, supported by a broader range of issuers and stronger investment-grade representation, according to Aberdeen Investments.

Aberdeen said insurers in the region are increasingly looking at EMD as they face low yields, high guarantee obligations and tighter capital requirements. 

The firm said the asset class now includes about $15.8t in local sovereign debt, $2.6t in US dollar corporate debt and $1.8t in US dollar sovereign debt. The market covers nearly 80 countries and more than 700 issuers. 

“APAC insurers are actively looking for ways to enhance income and diversify portfolios without increasing balance sheet strain. EMD is increasingly viewed as a practical solution - offering scale, liquidity, and attractive yield in today’s environment. Client engagement is accelerating, as insurers reposition EMD from a niche allocation to a core portfolio component,” Vivian Tang, Head of APAC Client Group, Aberdeen Investments, said in the report.

Aberdeen said hard-currency sovereign debt is benefiting from a reversal in the long-running trend of ratings downgrades, whilst local market debt continues to offer higher real yields than developed markets.

The company also noted that emerging market corporate fundamentals remain stable, with default rates expected to stay around 1% at index level. 

The report added that frontier markets such as Ghana and Egypt are showing improving fiscal conditions and stronger foreign exchange reserves. 

Aberdeen said returns in these markets are also less tied to global bond market movements because they are driven more by country-specific factors. 

Siddharth Dahiya, Global head of Emerging Market Debt at Aberdeen Investments, said the medium- to long-term outlook for EMD remains positive despite recent geopolitical tensions in the Middle East. 

“Fundamentals are strong, defaults remain contained and technicals continue to support valuations. This creates a powerful backdrop for investors seeking consistent income with meaningful diversification benefits,” Dahiya said.

Aberdeen said APAC insurers are operating in markets with limited local investment options and lower developed-market credit yields, making it more difficult to meet return targets and policyholder guarantees. 

The firm said emerging market investment-grade corporates currently offer around 30 basis points more spread per unit of leverage than comparable US investment-grade bonds, whilst maintaining lower leverage levels. 

Echo Yang, Senior Insurance Solutions director at Aberdeen Investments, said insurers are increasingly focused on how EMD can improve capital efficiency under risk-based capital and Insurance Capital Standard regimes. 

She added that insurers also need strong operational capabilities and portfolio management tools to manage the credit, currency and reporting complexities linked to EMD investments.