2016 is turning out to be a banner year for emerging market bonds. For government debt denominated in dollars, 25 countries’ bonds have a total return greater than emerging market equities, and 50 countries’ bonds beat the total returns of the S&P 500 index, according to iBoxx data.

As the chart shows, the combination of capital gains and high-yielding coupons has delivered eye-popping results. In the first nine months of the year, Ecuadorian debt returned 42%, Venezuela 39% and Zambia 31%. What’s striking is how many so-called frontier market issuers are at the top of the pack, along with evergreen emerging market stalwarts like Brazil and South Africa.

Flow data emphasises the trend. According to IHS Markit, exchange-traded funds investing in emerging market bonds had total inflows of $15.4 billion this year, while emerging market equity ETFs enjoyed inflows of $29.4 billion.

Clearly investors have lost their fear of this asset class. It might be something to do with the sight of Argentina capitulating to hedge funds after a long court battle, paying bondholders in full. Or the example of Venezuela, tolerating food riots and medicine shortages while scrupulously paying coupons on bonds trading at 50% of their value.

Another popular explanation is quantitative easing, particularly by the European Central Bank and Japan, compelling investors to cash-in on negative yielding sovereign debt and hunt for yield elsewhere. According to this view, QE is stoking a bubble in emerging market debt, creating the risk of a second ‘taper tantrum’ once central bank policy changes.

This may be true, but there are fundamental reasons for an investor reappraisal of emerging markets that go beyond short-term monetary policy. Christoph Lakner and Branko Milankovic’s impressive study of global income inequality has popularised the concept of the ‘elephant curve’, where emerging market income growth is accompanied by flagging income growth among developed world middle classes.

The narrative that this explains the rise of Donald Trump or the Brexit vote has prompted a debate, but perhaps more interesting is the striking emergence of a middle class in formerly poor countries. It isn’t enough just to point to the increase in GDP per capita of these countries, but also their declining income inequality.

That will have a big impact because this new populous middle class will expect things such as a health and education infrastructure, much of which will have to be funded by government borrowing.

While the inequality data still contain many gaps, it is tantalising that many of the same nations whose debt outperformed this year – such as Tunisia or Ecuador – are those whose inequality has declined in recent years. It suggests not only a need for future borrowing to fund infrastructure, but also a likely willingness to repay it among a larger pool of stakeholders.

The argument can also be made at the level of developed countries too. Many nations face a demographic timebomb with declining working-age populations and a growing pool of retirees. Conventional wisdom is to fund these retirees’ incomes with domestic government bonds.

However, QE has made these bonds cripplingly expensive, and working-age taxpayers may grow reluctant to pay for these liabilities. Immigration is one way of importing new taxpayers to solve the problem. If that becomes politically impossible, why not match retiree obligations with emerging market debt? In effect, this would take the taxes paid to governments by the new global middle class and pay them to the developed country retirees in the form of bond coupons.

There are plenty of risks still attached to emerging market bonds: the possibility of QE taper-induced volatility, the political risk of individual countries and skewed nature of investment opportunities (half of the $10 billion assets owned by Blackrock’s EMB ETF resides in the debt of just 11 countries).

But the changing fundamentals show that the perceived risks could also be overstated. Rather than a bubble, this year’s rush into frontier debt could be a sign of the new reality.