Why money is tilting to local-currency debt
Investors are finding value in local EM bonds thanks to cheaper valuations and the appeal of carry trades, where they borrow in lower-yield currencies to buy higher-yielding assets. You can see the shift in flows, positioning and performance.
Since late June, a Bloomberg gauge of EM local-currency sovereigns has outperformed its EM dollar-debt counterpart by in excess of 3 percentage points, positioning local bonds for their largest quarterly advantage since 2022. The setup could be tested, though, after the Federal Reserve raised rates and signaled it might do so again. A stronger dollar could sap demand for local-currency assets.
The greenback is a swing factor here. The 120-day correlation between the Bloomberg local-currency EM bond gauge and the Bloomberg Dollar Spot Index is around -0.51, the most negative in roughly a year. The dollar index rose 1.1% last week, its biggest weekly gain since early June.
What managers are saying and where money is going
Bank of America‘s latest survey shows managers leaning into this trade. Among 38 global fixed-income respondents with a combined $444 billion, 84% reported larger allocations to local-currency EM debt than to hard-currency EM bonds, compared with 38% in August, and the poll ran from Sept. 4 to Sept. 9.
“Current valuations lead us to favor local-currency debt over hard currency debt at this stage of the cycle,” said Diliana Deltcheva, the London-based head of emerging-market debt at Robeco. She noted local markets offer broader opportunities, while room for further spread tightening on hard-currency bonds “appears increasingly limited.” Deltcheva also highlighted Latin America’s high real yields and its strong position to attract capital.
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Fidelity International portfolio manager George Efstathopoulos said, “I prefer EM local currency bonds to EM dollar debt over the next few months, but would take a selective approach rather than seek broad index exposure.” “I favor Latin America, particularly Brazilian local currency bonds, with a focus on the front end of the curve,” backed by appealing carry and real yields.
Jupiter Asset Management fixed-income investment manager Harry Richards cautioned that if Treasury yields move higher and materially raise refinancing costs, EM hard-currency bonds could feel more strain. “Weaker sovereign and corporate issuers would be most exposed, particularly where debt-servicing capacity is already constrained.”
Flows, spreads and the Treasury effect
ETF flows through Sept. 18 underscore the preference. By contrast, the $5 billion VanEck JPMorgan EM Local Currency Bond ETF has attracted about $41 million to date this month, on top of August’s $294 million inflow. Each is the largest ETF in its respective category.
Higher Treasury yields have made investors think twice about taking on extra credit risk in EM dollar bonds. The extra yield over Treasuries on EM dollar debt is 1.69 percentage points, close to the 1.53 low hit in June and near the narrowest levels in almost 20 years. Meanwhile, the 10-year Treasury yield climbed to the highest in nearly two decades ahead of last week’s Fed hike, extending a months-long global bond selloff driven by sticky inflation, hefty government spending and large corporate borrowing tied to the artificial intelligence buildout.
Developing-world currencies have helped soften the blow for local debt holders. The MSCI Emerging Markets Currency Index is up 3.7% in 2026, putting it on course for a second straight yearly gain.
What this means for your money
Right now, the scales tip toward local-currency EM bonds: valuations look better, carry helps, and managers are voting with their feet. But the dollar and Treasuries are the bouncers at the door. A renewed dollar climb or another jump in yields could quickly shift the mood, especially for hard-currency EM debt. Keep an eye on ETF flows and that EM dollar spread over Treasuries to see which side has the momentum.
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