The financial crisis is forcing investors to look at the world through new eyes. A case in point: emerging-market government bonds. When emerging-market bond spreads tightened to record lows in 2006 and early 2007, it was seen as evidence that risk appetite had run too far. Having blown out following Lehman Brothers' collapse, spreads are narrowing again -- only this time, the balance of risks is no longer so stark.

The history of emerging-market sovereign debt has been littered with crises. The past decade or so alone has seen the Asian crisis, the Russian default and another round of restructuring in Latin America. Populist politics, poor fiscal management, a reliance on foreign-currency borrowing and fixed exchange rates were a magnet for trouble.

Could it be different this time? Scarred by those crises, many emerging markets entered the credit crunch in a stronger position. Governance has improved, many countries run current-account surpluses, foreign-currency reserves have grown, the middle classes are expanding and savings rates are high. Countries such as Brazil and Turkey have been able to cut rates during the crisis and still attract money.

Credit concerns are muted. In fact, investors are more focused on the fiscal strains on triple-A-rated sovereigns like the U.S. and U.K. Debt burdens among the biggest triple-A borrowers could rise above 90% of GDP by 2011, whereas emerging-market debt is set to remain flat at 40% of GDP, according to Fitch forecasts.

In addition, emerging-market liquidity may be less of a problem in the future. One reason is the ability of some sovereigns to issue more local-currency debt, tapping into domestic savings. For international investors, these bonds offer the added appeal of potential currency gains. Indeed, institutional asset-allocation moves should further underpin liquidity: Fund manager Ashmore estimates the emerging-market share of world GDP could hit 50% within a decade from 35% now, forcing investors to reconfigure their portfolios.

Of course, not all emerging markets are emerging equally. Eastern Europe looks worse off than some of Asia or Latin America, partly because of currency pegs, long since abandoned by many other countries in the late 1990s. That has made some Eastern European countries vulnerable to devaluation and default. Meanwhile, perennial defaulters, such as Ecuador and Argentina, have yet to convince the markets they have shaken the habit.

Even so, the asset class still offers value. The spread on J.P. Morgan's EMBI Global index has halved from its peak to 4.5 percentage points over Treasurys. It is still way above 2007's lows of around 1.5 points. Yet what has really changed since the crisis is that now developed government-bond markets also look risky -- albeit reflected in inflation or currency risk rather than outright default risk. That casts emerging markets in a new light.

Wall Street Journal