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2026-09-21 14:42:10
[Soaring US Treasury yields weaken the appeal of dollar-denominated emerging market bonds, prompting emerging market investors to turn to local currency sovereign bonds] (1) Emerging market investors are currently still inclined to hold local currency sovereign bonds as soaring US Treasury yields weaken the appeal of dollar-denominated emerging market bonds. (2) This strategy is driven by attractive valuations and the potential for returns through carry trades, where investors borrow low-yielding currencies and invest in high-yielding assets. (3) This preference is reflected in fund flows, holdings, and relative performance. Since the end of June, the Bloomberg Emerging Market Local Currency Bond Index has outperformed the dollar-denominated bond index by more than 3 percentage points, on track for its largest quarterly lead since 2022. (4) Fund managers are also taking advantage of this divergence. A Bank of America survey of 38 global fixed income fund managers with a total of $444 billion in assets under management showed that 84% of respondents overweighted emerging market local currency bonds relative to hard currency bonds, compared to only 38% in August. The survey was conducted from September 4 to 9. (5) However, this investment strategy may still face challenges after the Federal Reserve raised interest rates and hinted at further tightening of policy. If the US dollar strengthens again, it could prompt investors to withdraw from emerging market assets such as local currency bonds.
