A weakening U.S. dollar is breathing new life into emerging-market local-currency debt, an asset class that has been largely overlooked for more than a decade. According to EPFR data, emerging-market local-currency bond funds experienced record inflows in the week ending Wednesday, marking eight consecutive weeks of net investments.
Cautious Optimism Amid Global Uncertainty
Despite this positive trend, overall inflows remain relatively small. Concerns over tariffs, geopolitical tensions, and global economic uncertainty continue to hold back some investors. Still, market experts expect the momentum to persist, benefiting local debt markets in major emerging economies such as Brazil, Mexico, Indonesia, and India.
Jonny Goulden, head of emerging-market fixed-income strategy at JPMorgan, noted, “Many of the big emerging markets are tipping us off to foreign debt purchases, and some are starting to pick up. That could be a potential turning point.”
Yields and Returns Reflect Growing Interest
The yield on the JPMorgan GBI Emerging Markets Local Currency Index recently hit its lowest point since 2022, reflecting rising international demand. Since the start of 2025, emerging-market local-currency government bonds have returned more than 10%, outperforming hard-currency bonds, which have delivered around 4% returns, based on JPMorgan data.
Changing Investor Preferences Amid Dollar Weakness
The weakening dollar and increasing skepticism toward the U.S. exceptionalism trade — where investors favor assets tied to the U.S. economy — are pushing global investors to seek higher yields elsewhere. Last week, the dollar dropped to its lowest level in over three years, encouraging a search for better returns.
“The dollar is going to be significantly weaker. Bond yields or interest rates are going to go down — so people are going to look for yield,” said Luca Paolini, chief strategist at Pictet Asset Management. He added that emerging-market bonds are positioned to be among the main beneficiaries of this trend.
A Shift After Years of Outflows
Goulden explained that this shift ends a roughly 14-year period of foreign investor flight from emerging-market local-currency bonds. Over this time, the asset class has more than doubled in size, growing from around $6 trillion to $13 trillion, mostly driven by local investors and some global bond funds.
David Hauner, head of global emerging market fixed income strategy at Bank of America, said allocations to emerging markets were “absolutely at rock bottom” after the long dollar bull run and U.S. exceptionalism trade. He predicted steady inflows and double-digit returns in local currencies by year-end, even in dollar terms.
Diversification Away From Dollar Assets
This renewed interest aligns with a broader effort among international investors to diversify portfolios away from dollar and U.S. assets. Carlos de Sousa, portfolio manager at Vontobel, commented, “Local currencies have done very well so far this year. That’s a real direct, automatic impact of the dollar’s decline.”
Central Bank Policies Support Momentum
The outlook for U.S. Federal Reserve policies remains mixed, but many emerging-market central banks are moving toward rate cuts, which further supports the appeal of local bonds.
Phoenix Kalen, global head of emerging markets research at Societe Generale, described the current environment as “a rare golden age for local assets.” He highlighted opportunities in local-currency bonds from countries like the Philippines, Czech Republic, Hungary, South Africa, Turkey, Brazil, and Colombia, calling them “compelling value.”
Slow but Significant Shift
While experts acknowledge that this renewed interest does not yet reverse years of outflows, the trend is gaining traction. Hauner described the current inflows as a “trickle” rather than a flood but noted the significant impact small shifts can have.
“Emerging markets as an asset class are much smaller. So if you take 1% out of the U.S., that’s basically 20% of emerging markets. So the impact of that flow can be quite significant,” Hauner explained.
