Emerging-market investors are currently favoring local-currency sovereign debt over dollar-denominated developing-nation bonds. This shift is primarily driven by surging U.S. Treasury yields, which have made dollar debt less appealing. Local-currency debt, on the other hand, offers attractive valuations and the potential for profits from carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding assets. This trend is evident in recent market performance, with a Bloomberg index of local EM sovereigns outperforming a gauge of EM dollar bonds by over 3 percentage points since late June, marking the widest quarterly lead since 2022.
Major financial institutions such as BlackRock Inc. and JPMorgan Asset Management are also showing increased interest in emerging markets amidst global bond market turmoil. A survey conducted by Bank of America Corp. from September 4-9, involving 38 global fixed-income managers overseeing $444 billion, revealed that 84% reported a tilt towards local-currency EM bonds, a significant increase from 38% in August. Fidelity International portfolio manager George Efstathopoulos expressed a preference for EM local currency bonds, particularly in Latin America and Brazilian local currency bonds, focusing on the front end of the curve for appealing carry and real yields.
However, there are potential headwinds. A stronger U.S. dollar could reduce demand for local-currency assets, and continued rises in Treasury yields might increase refinancing costs, especially for weaker sovereign and corporate issuers in EM hard-currency bonds. The 10-year Treasury yield recently climbed to its highest in nearly two decades, partly due to sticky inflation and fiscal concerns. Despite this, the MSCI Emerging Markets Currency Index is up 3.7% in 2026, contributing to the attractiveness of local debt for holders.
