2026 has been a really interesting year so far, mainly due to risks from developed markets. We've had the AI credit concerns that spread into broader tech stocks. We had JGB selling off. We had a new Fed confirmation that was supposed to be hawkish. We had gold up, silver up, gold down, silver down. And what happened yet again, EM sailed right through it and is performing incredibly well. So that's so far how the year is progressing. Very similar to last year, a lot of noise, mostly from developed markets and EM benefiting or at least sailing through.

The other big reminder is geopolitics happened in 2026. Venezuela, the first reaction to the market was, oh my gosh, risk. Well, the risk was good for Venezuela and good for neighboring Colombia, which was at one point the best performing local currency bond market in the world.

So again, geopolitics, which get processed by most people thinking of their portfolios as, not negative for EM, not risky, but it represents upside risk.

The Case for EM Bonds

The case for EM bonds remains the same as far as we're concerned. The core of the case is the idea of fiscal dominance, that emerging markets do not have fiscal dominance and developed markets where most investors have their fixed income exposure are subject to fiscal dominance. Fiscal dominance is that government debt, when it's too high, means the central bank can't hike rates as much as they would otherwise.

Now the good thing about emerging markets is they have the good fundamental of low levels of government debt, but they're paying you a very high yield despite that. So the case for bonds is they're in good shape fiscally and pay you a lot. And if you want a finance version of it, they're low risk and high return.

The carry on EM bond funds, is around 7%. And the volatility on EM bonds is lower than it is on DM bonds. So if you've got higher return or yield or carry and lower risk measured by fundamentals or by volatility, that's pretty much an airtight argument in finance.

Key Themes

The three interesting themes are first, EM over DM. EM is the new developed market and DM is the new emerging market. We've made the argument based on fiscal dominance, but what does it mean very specifically? What are the implications?

We're likely to have a new reserve currency over the next 10 years and it'll be CNY. Whether it displaces the dollar I think is not the most important question. It'll probably share status. But if CNY continues to move towards reserve status, that's a profound anchor for the Asian currencies. It gives them great defensive characteristics and they're paying higher yields and they're trading with a CNY, it pays lower yields and that's appreciating. So it's a huge tailwind for even the low-yielding Asians. But most EMs, other than basically Poland and Mexico, trade much more with China than they do with the US. So a stable or appreciating CNY compared to their higher yielding currencies is also a significant tailwind. And this can affect countries as high yielding as Brazil or Chile.

Number two, commodity exporters, the commodity currencies, Colombia, Chile, South Africa, Brazil. Commodity prices are strong. Metals in particular,

And the third theme is this idea that the dollar is, going to lose its status or that the dollar's even going to be down this year is way overdone. The dollar against Euro and Yen could be strong. So this is really a story of currencies doing well, regardless of where you sit. Whether you sit in Australia or Europe or the US or Japan, EM currencies will generate higher carry and better return against your currencies over a cycle.

EM’s Risk Profile Has Changed

If there is a generic risk off, EM was traditionally thought of as a high beta reactor. And that hasn't been the case for a few decades. It's turned out to react very defensively. A big part of that is that locals trust their own governments and so they don't send assets offshore. At most they might sell their local currency bonds but they buy their own dollar denominated bonds. So, their own fundamentals generally for all EMs have created very new risk return characteristics. And in the last several years, bonds as a category are lower in volatility than DM bonds and EMFX is lower in volatility than DMFX. So already for several years now, the volatility profile is reflecting the fundamental profile, which is these are low risk places.

So that's been one really important development. Now, the epicenter of this is Asia. It's really the Asian bond markets that are the safest, and those are the ones that are going to become the new reserve currencies. Malaysian ringgit bonds should be, and we think are, reserve currencies, just as with gold. The central banks are not going to send a press release saying, hey, by the way, we're buying tons of gold. So, those are the first beneficiaries of this low volatility safety dynamic in a world of central banks looking for safe assets and gold is not the only one.

The reason why emerging markets is especially exciting right now is look at the newspapers. Every story is about over-indebted governments not paying you enough. And EM is a story of well-run under-indebted governments arguably paying you too much.

Number two, the other big discussion is the dollar status. Well, you need another side to that. You need another currency. And CNY is rising. This has really powerful positive implications for EM currencies.

And third, the carry or yield is higher in EM bonds. Typical funds have 5 to 7% yields. And the volatility of EM bonds and currencies is lower than that of DM bonds. So if your return or yield is higher and your volatility is lower than alternatives, I really don't get how there could be a stronger case than that.