Yield Advantage: Why EM Local Bonds Are Leading DM Bonds in 2025

Key Takeaways:

• EM local-currency bonds have delivered high real yields and strong 2025 performance.
• Improved policy credibility has boosted the resilience of EM local-currency bonds to shocks.
• Elevated income and diversification make the EM local-currency bonds appealing.

Key Risks:

• Exposure to currency volatility and shifts in global risk sentiment may impact returns.
• Political uncertainty and changes in policy direction could introduce additional volatility.

Emerging market (EM) local-currency bonds have delivered astounding performance in 2025 despite initial fears around local currency devaluation versus the US dollar due to tariffs. Year-to-date, the asset class outpaced most fixed income segments including US high yield and the broad US and global markets. EM local bonds can be an attractive option for fixed income portfolios, offering high yields from issuers with credible monetary policy in a world where developed markets may grapple with sticky inflation and limits on central bank effectiveness. With strong fundamentals and higher yields, the asset class has shown that it can be resilient to external risk-off shocks. However, investors must know that this resilience does not eliminate heightened idiosyncratic and macroeconomic risks inherent to emerging markets.

Higher Yields, Better Value?

Worries about rising inflation and debt levels in the US prompted investors to consider the diversification benefits of non-US dollar assets, raising the appeal for EM local bonds, but that’s only half of the story. On top of that, sovereign bond yields in EM countries remain high, as many EM central banks started tightening in 2021 well ahead of advanced economies, front-loading hikes to contain post-pandemic inflation. The result has been high real yields which continue to be an important driver of return.

High Yields in EM Cushion Market Turbulence

Source: VanEck, Bloomberg, J.P. Morgan, ICE Data Indices, LLC. Data as of 30/09/2025. See disclosures below for information on the indices that represent each category above. US HY is represented by the ICE BofA US High Yield Index. EM LC Sov is represented by the J.P. Morgan GBIEM Global Core Index. EM HY Corp is represented by the ICE BofA Diversified HY US Emerging Markets Corporate Plus Index. EM USD Sov is represented by the JPM EMBI Global Diversified Index. EM Corp is represented by the ICE BofA EM Diversified Corporate Index. US IG Corp is represented by the ICE BofA US Corporate Index. US Agg is represented by the ICE BofA US Broad Market Index. Global Agg is represented by the ICE BofA Global Broad Market Plus Index. Real yield is the nominal yield minus the forecasted rate of inflation. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

EM Sovereign Local Bond Returns Exceed Those In Developed Markets YTD

Source: Morningstar. Data as of November 2025. See disclosures below for information on the indices that represent each category above. EM Local Bonds is represented by the J.P. Morgan GBI-EM Global Diversified Index. 50:50 EM is represented by the 50% J.P. Morgan EMBI Global Diversified Index/50% J.P. Morgan GBI-EM Global Diversified Index. USD EM Sovereign is represented by the J.P. Morgan EMBI Global Diversified Index. EM Corporates is represented by the J.P. Morgan CEMBI Broad Diversified Index. Global Broad Market is represented by the ICE BofA Global Broad Market Index. US Corporates is represented by the ICE BofA US Corporate Index. US High Yield is represented by the ICE BofA US High Yield Index. U.S. Broad Market is represented by the ICE BofA US Broad Market Index. US 10Y Treasuries is represented by the ICE BofA 10-Year Current Treasury Index. DM Sovereign is represented by the ICE BofA Developed Markets Sovereign Bond Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index. See important disclosures and index definitions at the end of the presentation.

Markets Resilience

Emerging markets have proven that it can be resilient to external risk-off shocks this year, displaying a significant improvement post the Global Financial Crisis. Even this year, after April’s US tariff tantrum, EM local bonds quickly regained their footing and have led the fixed income category year to date. This isn’t a work of magic, but policy driven: EM policymakers have built credibility through years of disciplined spending and orthodox monetary policy, resulting in more anchored inflation expectations and stronger fundamentals versus developed markets. Further, higher funding in local currency and better debt management have reduced their sensitivity to global/external shocks.

After an outstanding run in 2025, EM local-currency bonds might have regained investor attention – leading with performance and explained by fundamentals. Strong debt management and responsible monetary policies have provided EMs with room to cut rates, while local yields remain elevated. High level of income, robust fundamentals and diversification benefits could make emerging markets local-currency bonds an attractive addition to a global fixed income portfolio.

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