Which risk is typically associated with investing in emerging market bonds?

When investing in emerging market bonds, currency risk is a significant concern due to the nature of these investments. Emerging markets often have currencies that are less stable and can be subject to greater volatility compared to major developed market currencies. This means that fluctuations in the value of the local currency against the investor's base currency can greatly affect the returns on investment. For example, if an investor buys a bond denominated in an emerging market currency, and that currency depreciates against the US dollar, the returns will diminish when converted back to dollars, regardless of the bond's interest rate or coupon payments.

Additionally, many investors may be unaware that emerging markets often experience economic instability, political turmoil, or external shocks, all of which can directly impact currency valuations. Thus, while market, counterparty, and reinvestment risks also exist in bond investments, currency risk in emerging markets stands out as a prevalent and often critical factor that investors must consider.