What is a main risk associated with bonds from emerging markets?

Bonds from emerging markets carry a notable risk related to low liquidity and high premiums. Low liquidity means that these bonds can be challenging to buy or sell quickly without a significant price concession, which can lead to increased transaction costs and difficulties in executing trades. This lack of liquidity can exacerbate price fluctuations, especially in times of market stress.

High premiums are often associated with the risk of investing in these markets, reflecting the higher required yield that investors seek in compensation for taking on additional risks. This includes economic instability, political risk, and the possibility of default. Investors demand higher yields due to the perceived risk of not being able to recover their investment, which can lead to premiums on these bonds.

In contrast, high credit ratings would generally indicate lower risk, price stability in adverse conditions implies resilience which may not be present in the emerging market context, and government guarantees on debt would suggest a safety net that is often lacking in many emerging market bonds.