EM Local Bonds Beat Dollar Debt by 3 Points Since June
Emerging-market investors shift to local currency bonds as dollar debt yields lag behind US Treasuries.
Key points
- Local EM bonds outperformed dollar debt by 3.0 points since June, the biggest gap since 2022.
- 84% of surveyed fund managers are overweight local EM debt, up from 38% in August.
- The yield spread for EM dollar bonds is near a two-decade low, reducing relative appeal.
Emerging-market local currency bonds have outperformed dollar-denominated debt by 3.0 percentage points since late June. This marks the largest quarterly gain for local debt relative to dollar bonds since 2022, according to Bloomberg data.
Investors are favoring local assets due to attractive valuations and potential carry trade profits. The shift reflects a strategic move away from dollar debt, which offers less yield advantage over US Treasuries.
Fund managers increase local debt exposure
A Bank of America survey of 38 global fund managers shows 84% are overweight local EM debt. This is a sharp rise from 38% in August, indicating a rapid change in portfolio positioning among major investors.
Capital flows confirm this trend, with the VanEck EM Local Currency Bond ETF gaining $41 million in September. In contrast, the iShares USD EM Bond ETF has seen roughly $900 million in outflows this month.
Dollar debt yields near two-decade low
The yield spread between EM dollar bonds and US Treasuries stands at 1.65 percentage points. This is near the lowest level in almost twenty years, reducing the incentive to take on extra credit risk.
Robeco’s head of EM debt notes that hard-currency spread tightening appears increasingly limited. Local markets offer a broader set of opportunities, particularly in regions with high real yields like Latin America.
Dollar strength poses a key risk
A renewed advance in the dollar could turn investors away from emerging-market assets. The 120-day correlation between local EM bonds and the dollar index is now -0.51, the most negative in a year.
The dollar index climbed 1.1% last week, its largest weekly gain since early June. However, developing-nation currencies have provided a cushion, with the MSCI EM Currency Index up 3.7% in 2026.
