A weakening U.S. dollar is lifting a long-neglected asset class - emerging market local currency debt - after a more than decade-long drought. Emerging market local-currency bond funds saw a new record of inflows in the week to Wednesday, according to EPFR data, notching eight straight weeks of inflows.
Investor flows into emerging market bonds picking up after long drought. EM bond funds marked eight weeks of inflows - and a record $3.8 bln the week ending 13 June. Investor flows into emerging market bonds picking up after long drought. EM bond funds marked eight weeks of inflows - and a record $3.8 bln the week ending 13 June. The nascent flows remain small - and the uncertainty of tariffs, war and other global turmoil are stemming
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But investors expect they will continue, giving a boost to local debt markets in large emerging markets from Brazil and Mexico to Indonesia and India. "Many of the big emerging markets tell us about all the foreign buying of debt, and that is starting to pick up across some countries," said Jonny Goulden, head of emerging market fixed income strategy at JPMorgan. "This could be a potential turning point." Yields on the JPMorgan GBI Emerging Market local currency index are at their lowest since 2022 - partly a sign of flows of international cash. Emerging market local currency government bonds have enjoyed returns of more than 10% since the start of the year - more than double the around 4% delivered by the hard-currency peers, according to JPMorgan indexes.
The weaker U.S. dollar, and questions over the years-long U.S. exceptionalism trade - when investors parked cash in booming assets of the world's largest economy - is nudging international investors to look elsewhere for bigger returns. The greenback slipped to its lowest level in more than three years last week. Slower global growth - and lower interest rates across the developed world - are adding to the hunt for yields. "The dollar is going to be much, much weaker. Bond yields or interest rates will fall - so there is a search for yield," said Luca Paolini, chief strategist at Pictet Asset Management. Emerging market bonds look set to be one of the main beneficiaries of that momentum, he said. The dynamics combined are helping to end the foreign investor flight from emerging markets' local currency bonds that Goulden said has lasted for some 14 years.
