Emerging-market investors are for now sticking with local-currency sovereign debt as surging Treasury yields dim the appeal of dollar-denominated developing-nation bonds.
Behind the strategy are attractive valuations and the potential to profit from carry trades, where investors borrow in low-yielding currencies to invest in higher-yielding assets.
Read more: JioBlackRock CIO Rishi Kohli decodes Nifty’s inflection point after two years of weak returns
The preference is showing up in fund flows, positioning and relative performance. A Bloomberg gauge of domestic EM debt has beaten an index of dollar-denominated bonds by more than 3 percentage points since the end of June, set for the biggest quarterly outperformance since 2022.
Fund managers are leaning into that divergence too. A Bank of America Corp. survey of 38 global fixed-income fund managers overseeing $444 billion in combined assets showed that 84% of the respondents were overweight local EM debt relative to hard currency bonds, versus just 38% in August. The poll was conducted between Sept 4 and 9.
Read more: Will Nifty extend gains to 4th session on Monday? US sanctions on Russia among factors to decide D-Street action
The trade could still be tested after the Federal Reserve raised interest rates and signaled it may do so again. A renewed advance in the dollar could turn investors away from emerging-market assets such as local-currency debt.
