EM Local Currency Bonds Shine as U.S. Dollar and Rates Wobble
May 16, 2025
Read Time 3 MIN
Emerging markets (EM) local currency sovereign bonds have strongly outperformed other major global fixed income asset classes this year. The U.S. dollar has been notably weak year to date through May 13, 2025, declining approximately 7% versus a basket of developed markets trading partners. However, the strength of emerging markets currencies, which have gained approximately 4% year to date, only explains about half of the return this year of the JP Morgan GBE EM Core Index. The remainder of the return this year is explained by local interest rates and bond price movements, with a yield of over 7% generating significant income return.
EM Local Currency Bonds Have Strongly Outpaced Most Of Their Peers
Source: J.P. Morgan and ICE Data Indices as of 5/13/2025. EM Local Sov represented by J.P. Morgan GBI-EM Global Core Index; Global Broad Market represented by ICE BofA Global Broad Market Index; EM USD Sov represented by J.P. Morgan EMBI Global Diversified Index; Global DM Sov represented by ICE BofA Developed Markets Sovereign Bond Index; US HY Corp represented by ICE BofA US High Yield Index; US Broad Market represented by ICE BofA US Broad Market Index; US IG Corp represented by ICE BofA US Corporate Index.
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EM local bonds lagged most other fixed income in the first five years of the past decade. However since then, they have outperformed all of the segments shown above, other than U.S. high yield corporates and U.S. dollar-denominated EM sovereign bonds. However recent performance of EM local bonds stands out, particularly following the U.S. tariff announcement on April 2, 2025, or “Liberation Day,” when U.S. rates increased sharply while the U.S. dollar also depreciated. Several possible explanations for the weakness in U.S. fixed income (and U.S dollar assets generally) have been put forth including a decline of confidence in U.S. institutions and doubts around the U.S. dollar’s role as a reserve currency, unwinds of leveraged basis trades and selling of U.S. Treasuries by foreign central banks. It is possible that a combination of these or other factors explain what has been observed. In any case, we believe the case for diversification outside of U.S. rates and the U.S. dollar has become stronger, and EM local currency bonds are an attractive way to achieve this within a fixed income portfolio.
In addition to diversification benefits, we believe EM fundamentals also justify an allocation to EM local bonds. Developed markets economies are characterized by very high debt-to-GDP ratios, fiscal deficits, and increasing political dysfunction. In addition to lower debt levels and more disciplined fiscal policy, emerging markets have benefited from independent central banks that have prioritized keeping inflation under control. For example, most EM central banks hiked policy rates swiftly and decisively soon after the COVID pandemic started, getting ahead of inflation. The results have been both high real and nominal interest rates. Sticky inflation and geopolitical conflict may also keep commodity prices elevated, benefiting the currencies of commodity exporting countries such as Brazil, Indonesia, and South Africa.
EM bond mutual fund and ETF flows have been significantly negative over the past several years1, indicating that many investors remain underallocated to the asset class. As a result, renewed interest may set up a favorable technical backdrop. Along with favorable fundamentals, the ability to diversify away from U.S. rate and dollar risk, and achieve a yield of over 7%, we believe it’s time to take another look at EM local currency bonds.
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Important Disclosures
1 Source: Morningstar Direct, as of 4/30/2025.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The J.P. Morgan GBI-EM Global Core tracks local currency bonds issued by emerging markets governments.
J.P. Morgan EMBI Global Diversified Index: is comprised of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by emerging markets sovereign and quasi-sovereign entities. The index weighting methodology limits the weight of countries with larger debt stocks.
J.P. Morgan GBI-EM Global Core Index (GBIEMCOR): tracks local currency denominated EM government debt. The index weighting methodology limits the weight of countries with larger debt stocks, with a maximum of 10% and a minimum of 1% to 3% depending on the amount of the country’s eligible debt outstanding.
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA US Corporate Bond Index tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA Developed Markets Sovereign Bond includes sovereign debt with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U. S. and Western European countries, denominated in the issuer’s local currency. The FX G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden.
ICE BofA Global Broad Market Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities
ICE BofA US High Yield Index: is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Associates Corporation.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
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Important Disclosures
1 Source: Morningstar Direct, as of 4/30/2025.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this blog.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The J.P. Morgan GBI-EM Global Core tracks local currency bonds issued by emerging markets governments.
J.P. Morgan EMBI Global Diversified Index: is comprised of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by emerging markets sovereign and quasi-sovereign entities. The index weighting methodology limits the weight of countries with larger debt stocks.
J.P. Morgan GBI-EM Global Core Index (GBIEMCOR): tracks local currency denominated EM government debt. The index weighting methodology limits the weight of countries with larger debt stocks, with a maximum of 10% and a minimum of 1% to 3% depending on the amount of the country’s eligible debt outstanding.
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA US Corporate Bond Index tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA Developed Markets Sovereign Bond includes sovereign debt with a country of risk that is a member of the FX G10, all Western European countries, and territories of the U. S. and Western European countries, denominated in the issuer’s local currency. The FX G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden.
ICE BofA Global Broad Market Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities
ICE BofA US High Yield Index: is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Associates Corporation.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.