Emerging market investors are currently prioritizing local-currency sovereign debt, moving away from dollar-denominated developing-nation bonds. This shift is primarily driven by surging US Treasury yields, which have made dollar-denominated EM bonds less attractive. Since late June, a Bloomberg index tracking local EM sovereign debt has outperformed a similar index for dollar EM bonds by over 3 percentage points, signaling the widest quarterly lead since 2022.
This preference is evident in recent surveys and fund flows. A Bank of America Corp. survey of 38 global fixed-income managers, collectively managing $444 billion, revealed that 84% reported a greater allocation to 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, citing appealing carry and real yields. Similarly, Robeco's head of emerging-market debt, Diliana Deltcheva, noted the broader opportunities and favorable valuations in local markets.
Fund flow data further supports this trend. The $14 billion iShares JPMorgan USD Emerging Markets Bond ETF experienced nearly $900 million in outflows so far in September, marking what is set to be its largest monthly outflow since March. In stark contrast, the $5 billion VanEck JPMorgan EM Local Currency Bond ETF, the largest in its category, attracted approximately $41 million this month, adding to August's $294 million inflow.
Rising US Treasury yields are making investors reconsider the credit risk associated with EM dollar bonds. The additional yield offered by EM dollar debt over Treasuries is currently 1.69 percentage points, close to the 1.53 low recorded in June and near its narrowest level in almost two decades. Harry Richards of Jupiter Asset Management warned that higher Treasury yields could strain EM hard-currency bonds, particularly weaker sovereign and corporate issuers with constrained debt-servicing capacity. However, developing-world currencies have provided some buffer, with the MSCI Emerging Markets Currency Index up 3.7% in 2026, on track for a second consecutive annual gain.
