A stellar year for emerging-market bonds is set to get even better as the return of the "dollar debasement trade" amplifies inflows into the asset class, fund managers say.
Emerging-market bonds have rallied alongside gold and Bitcoin this month as mounting anxiety over the US deficits have spurred demand for alternatives to the greenback. This asset rotation is being driven by fear the dollar will lose its purchasing power, hence the use of the term "debasement."
Inflows into emerging markets are justified by their superior fiscal management and tight inflation control, according to JPMorgan Asset Management, Invesco and Marlborough Investment Management.
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"We are very bullish for what the continuation of the dollar debasement trade means" for emerging-market bonds, said Swa Wu, head of Asia ex-Japan fixed-income investment specialists at JPMorgan Asset Management in Hong Kong. "EM central banks have proved themselves to be a lot more disciplined about inflation targeting than their developed-market counterparts."
Emerging-market local-currency bonds have gained 3.3% this year, while their developed-nation peers have dropped 1.9%, according to Bloomberg total return indexes. Emerging bonds have outperformed even after suffering a 3.8% slump in March due to the outbreak of the US—Iran war.
The dollar debasement trade has revived in recent months as the US national debt climbed to $40 trillion, eroding the appeal of the greenback as a store of value. The trade gained extra traction in mid-August after Treasury Secretary Scott Bessent announced plans to buy back longer-maturity Treasuries, effectively capping the potential return from holding long-term dollar assets.
While developed nations such as the US, France and Germany face elevated fiscal deficits, many emerging markets have learned the lessons of previous episodes of financial turmoil, such as the Latin American debt crisis of the 1980s and the Asian Financial Crisis of 1997—98. This has made them more determined to adhere to fiscal discipline.
This embrace of orthodox policy makes emerging markets more attractive, according to UK-based Marlborough Investment Management.
“I have been saying publicly for years — if I want policy orthodoxy, I go to emerging markets, not developed,” said James Athey, a money manager at the investment firm.
“We don’t own a single European government bond, and no US Treasuries past the 10-year maturity,” Athey said. “The bulk of our duration is Australia, New Zealand and emerging markets,” including government debt in Mexico and Chile, he said.
The flow of funds toward emerging markets reminds some investors of the pivot toward the asset class that took place following the “Liberation Day” tariff increases announced by US President Donald Trump in April last year.
“Post Liberation Day, investors favored non-US assets when allocating portfolios, and we saw a strong rotation into EM assets,” said Wim Vandenhoeck, co-head of emerging-market debt at Invesco in New York. The current rotation is likely to continue as “EM is both stronger and more diverse than people give it credit for,” he said.
Investors poured a cumulative $440 million into the $5 billion VanEck J.P. Morgan EM Local Currency Bond Exchange-Traded Fund from April to June 2025 — marking the largest inflow since the first quarter of 2019.
While emerging-market bonds are having a bumper year, they still face a number of risks.
US Treasury 10-year yields have been climbing in recent months and are currently at 4.72%, near the key threshold of 5% that may attract funds back to dollar assets. The latest uptick in global oil prices is also a warning that emerging-market government finances remain relatively exposed to higher energy costs.
And the greenback also got somewhat of a reprieve Friday after Federal Reserve Chairman Kevin Warsh’s vow to fight inflation, which boosted bets on interest-rate hikes this year.
For now, though, money managers see the dollar debasement trade as a sound reason to shift more funds into emerging markets.
The recent concerns over US debasement have reignited the market’s incentives to diversify from overweight US dollar positioning into other assets, including emerging-market currencies and rates, said Leonard Kwan, a portfolio manager of the T. Rowe Price Dynamic Emerging Markets Bond Strategy.
“We have been positively positioned” and constructive over Latin American rates, and this debasement theme provides an additional tailwind to our position, he said.
