10 September 2026
Major developed economies are increasingly devoting substantial resources to servicing sovereign debt, challenging the assumption that developed market government bonds are inherently lower risk. In the US, net interest payments on federal debt have risen to close to $1 trillion annually and now exceed defence spending. In the UK, debt interest costs are significantly higher than defence spending and consume around one pound in every ten of government revenue. France faces a similar challenge, with debt servicing costs rising as higher interest rates feed through into a large and growing public debt burden.
These examples do not mean that developed market sovereigns are equivalent to emerging markets. Reserve currency status, deep domestic capital markets and institutional strength remain important sources of resilience. Rather, they demonstrate why traditional economic classifications can obscure meaningful differences in fiscal and external strength. For bond investors, the more relevant question is whether an issuer has the balance sheet capacity to withstand higher funding costs, weaker growth and fiscal shocks.
This creates opportunities from a relative value perspective. Selected emerging market sovereign and quasi-sovereign bonds can trade at meaningful premiums to developed market debt even where their underlying external positions are stronger. The opportunity is therefore not simply to seek higher yields, but to identify where the market appears to offer insufficient compensation for the risks of one issuer relative to another. We focus on the relationship between spread and financial strength, rather than yield in isolation.
This is particularly relevant to passive fixed income investing. Market capitalisation weighted bond indices allocate capital broadly in proportion to debt outstanding, meaning that countries issuing more debt tend to command larger index weights. Investors tracking such indices can therefore become structurally exposed to the largest borrowers, irrespective of whether their underlying balance sheets are strengthening or deteriorating.
We therefore look beyond conventional market classifications and focus on Net Foreign Assets (NFA) as an important measure of national financial strength. NFA captures the difference between a country’s external financial assets and liabilities, providing insight into whether an economy is a net creditor or debtor to the rest of the world. In our view, this creditor–debtor distinction can be more informative for sovereign bond selection than a simple developed or emerging market label.
By combining NFA analysis with an index agnostic, relative value approach, we seek to identify sovereign and quasi-sovereign issuers where valuations do not fully reflect underlying financial strength. This includes opportunities across Abu Dhabi, Qatar, Norway, Mexico and Chile, where strong external positions and sovereign resilience can, in our view, create attractive relative value compared with more highly indebted developed market issuers.
The objective is not simply to find the highest yield, but to determine where investors are being best compensated for the risks they take.