Funds, including those managed by JPMorgan Asset Management and BlackRock Inc., are finding an advantage in emerging markets, particularly in local-currency bonds. This shift comes as government bonds in major economies like the US and Japan have declined due to energy-driven inflation and fiscal concerns, which have raised the prospect of higher interest rates. In contrast, many developing nations have avoided the worst of this selloff, benefiting from relatively contained inflation, already-implemented restrictive monetary policies, and stronger fiscal health in several countries.
Investors are increasingly drawn to emerging-market local-currency debt, viewing it as a valuable diversifier. This type of debt, issued and repaid in the local currency, offers exposure to both interest rates and currency fluctuations. While traditionally seen as a niche and volatile segment, its appeal has grown significantly, partly due to attractive nominal yields offered by countries such as Brazil, Mexico, Indonesia, and South Africa.
The trend also reflects a broader diversification strategy by investors away from US assets, particularly as global trade turmoil and tariff threats from the US impact the dollar. Emerging market local-currency bonds have shown a strong start to the year, outperforming their dollar-denominated counterparts. This is driven by expectations of interest rate cuts in developing nations and cooling inflation due to lower oil prices, while dollar bonds underperform amidst concerns over the US greenback.
