Emerging-market bonds in local currencies are outperforming their dollar-denominated counterparts, despite offering lower yields—even compared to US Treasuries. So far this year, they’ve delivered a 3.2% return, versus just 0.7% for dollar bonds, according to Bloomberg data.
The rally is fueled by expectations that emerging central banks will cut rates as global trade tensions—triggered by US President Donald Trump’s April 2 tariff announcement—cool inflation and slow growth. In contrast, dollar bonds have underperformed as recession fears pressure the greenback.
“We strongly prefer EM local debt,” said Jon Harrison of GlobalData TS Lombard, citing a weaker dollar and more policy space in developing nations.
Remarkably, these local-currency bonds now yield 4.03% on average, compared to 7.1% for dollar bonds and 4.12% for US Treasuries. This inversion underscores investor belief that local bonds carry less relative risk in the current climate.
An index of one-year interest-rate swaps in 18 EM economies fell 15 basis points in April, signaling the biggest drop since September. Strategists say local-currency bonds also offer more flexibility to trade on monetary policy and FX views.
Meanwhile, the US dollar has dropped nearly 4% this month, boosting emerging currencies. The weak dollar and long USD positions could provide multi-year tailwinds for EM assets, says Fidelity International.
Issuers are also growing cautious: EM dollar bond issuance (ex-China) dropped 36% year-on-year in April, to just $5.1 billion.Goldman Sachs expects the trend to continue: “Local EM rates should outperform amid recession concerns.