Safe assets are meant to be dull. Yet the world’s central financial market has lately supplied much of the excitement. Long-dated US Treasury yields have climbed as investors weigh persistent deficits, heavy issuance and fewer dependable buyers.
China’s Treasury holdings fell to roughly $618bn in July, their lowest since 2008 and less than half their 2013 peak. US Federal Reserve chair Kevin Warsh, meanwhile, wants to reduce the central bank’s bond portfolio. That may produce a leaner institution, but it requires private investors to absorb more debt precisely when Washington is issuing plenty of it.
None of this dethrones the treasury market overnight. The US still supplies the world’s reserve currency, deepest capital markets and an unrivalled ability to borrow in its own money. But privilege does not confer immunity. The benchmark safe asset increasingly carries a premium for fiscal, political and duration risk.
The distinction between developed markets (DMs) and emerging markets (EMs) is becoming less tidy. Ageing populations, weak trend growth, structurally large deficits and bond markets sensitive to government promises now feature across advanced economies. Immigration might soften demographic decline but has become a politically incendiary issue. Defence, industrial policy and the energy transition are adding claims on stretched budgets.
Institutional advantages are proving less permanent too. Central bank independence faces pressure, party systems are fragmenting and tariffs have become vehicles for geopolitical influence. A DM label is no longer a guarantee against policy volatility.
Parts of the emerging world have moved in the opposite direction. The International Monetary Fund’s (IMF’s) October 2025 World Economic Outlook asks whether EM resilience reflects benign conditions or better policymaking. Both matter, but policy reform deserves more credit than the old stereotype permits.
That stereotype was built around a familiar calamity, where countries borrowed in dollars to finance growth. When global liquidity retreated, currencies fell and foreign debts jumped. Central banks raised rates into recessions while governments cut spending, transforming capital flight into sovereign distress.
For many larger EMs, that machinery is less potent now. The IMF estimates that EMs’ net foreign asset positions have improved by 13% of GDP relative to the pre-global financial crisis period. The local-currency share of external liabilities has risen by 12.5 percentage points. Its modelling suggests that stronger balance sheets have roughly halved the likelihood of a sudden stop.
‘Safe enough’
Reserves are only part of the defence. EM central banks adopted inflation targets, allowed exchange rates to absorb shocks and responded earlier to the post-pandemic inflation burst. Governments cultivated local bond markets and regulators acquired macroprudential expertise.
The Bank for International Settlements describes an ecosystem supported increasingly by local-currency borrowing, resident investors and financial links among EMs. The IMF’s Global Financial Stability Report also associates deeper domestic investor bases with greater resilience. Macroeconomic credibility has steadily migrated south and east.
It means that debt ratios reveal less than they appear to. The better test is fiscal optionality, which gives a government the economic and political means to change course. Some wealthy states have efficient tax systems but little appetite to reform pensions, health care or entrenched commitments. Their low borrowing costs long rested on the belief that they would remain low.
Some EMs face more expensive funding today, yet retain scope to widen tax bases, formalise activity, improve collection and harness faster nominal growth. This is not fiscal space today — it is an ability to create more tomorrow.
Politics decides whether that option is exercised. Stronger macroeconomic institutions do not guarantee healthier political ones. The next EM rupture could begin with pressure on a central bank or an unfunded electoral pledge. EMs are also not homogeneous. Economies with flexible currencies, credible monetary authorities and deep domestic markets bear little resemblance to frontier borrowers reliant on short-term foreign funding.
Geopolitics widens the divide. Countries like India, Indonesia, Brazil, Mexico and the Gulf states can trade and attract capital across rival blocs, gaining bargaining power that the old world order seldom allowed.
South Africa embodies both sides of this rerating. Its debt service burden is formidable, municipal weakness infects the fiscal picture and coalition politics could obstruct reform. Yet it also has an independent central bank, a floating currency, sophisticated capital markets and a substantial domestic savings pool. Most public debt is rand-denominated, while electricity and logistics reforms offer incomplete but genuine upside.
South Africa is no safe haven. But that may set the bar too high. As traditional havens accumulate fiscal and political risk, “safe enough” can become investable, as investors target credible institutions, positive real yields, liquid markets and asset prices that acknowledge what can go wrong.
DMs and EMs have not traded places, but the distance between their risks has narrowed. Risk has changed address, and while global capital is actively adapting to the new map, legacy benchmark frameworks are still playing catch-up.
Packirisamy is group economist for the Momentum Group
