Emerging Markets (EM) local currency debt is emerging as a surprising beneficiary in the shifting global landscape shaped by recent U.S. policies. The asset class has delivered an impressive 8% return year-to-date—more than triple the returns of other high-yielding fixed income asset classes, such as EM hard currency debt, U.S. and Euro high-yield debt.1 This marks a significant turnaround from underperformance in 2010 – 2024, when local bonds posted a mere 1% annualized return compared to much higher gains in other asset classes.
Can this outperformance continue? Several factors suggest to us that it could. The first lies in the evolving dynamics of the U.S. dollar. Historically, EM local debt excelled during periods of U.S. dollar weakness. Recent dollar declines reflect shifting global trade and investment flows—driven by changes in U.S. geopolitical policies and a focus on reshoring—that favor more diversification in non-U.S. assets. This change is reflected in the numbers: The annual U.S. net international investment position (NIIP) stands at -$26 trillion as of 2024 compared to -$2.5 trillion in 2010; with the dollar likely overvalued by 20% or more, in our view, it could potentially decline by 3 – 4% per year, on average, over the next decade.
Past performance is not a guarantee of future results
EM Local Debt Has Outperformed in Periods of Dollar Weakness
Source: Bloomberg, Neuberger Berman calculations, as of May 16, 2025. JP Morgan GBI EM Global Diversified TR index for EM Local, JP Morgan EMBI Global Diversified TR index for EM Hard Currency, JP Morgan CEMBI Diversified TR index for EM Hard Currency Corporates, Bloomberg U.S. Corporate High Yield Bond Index in USD for U.S. High Yield, Standard & Poor’s 500 TR index for U.S. Equities, MSCI World Equity TR Index for Global Equities.
Importantly, EM currency fundamentals appear strong compared to history, as measured by low aggregate current account deficits. Supply-side-driven lower oil prices—another pillar of the change in the U.S. policy—have fostered more favorable terms of trade for many EM countries, from Asian manufacturing exporters to metal exporters in Latin America and Africa. Low oil prices together with cheaper imports from China could decrease inflation and support domestic demand. Our country-level growth forecasts suggest that, despite the effect of tariffs, EM’s growth differential with the U.S. should remain positive—a trend that has historically led to foreign portfolio inflows. These dynamics should support local currencies and keep inflation subdued, allowing central banks to lower rates.
High yields reinforce the current appeal of local bonds. The local bond GBI-EM index carries a nominal yield of 6% (including 9% on the Latin American subindex), while local bonds’ real rates remain well above those of developed markets (see below).
Local EM Offers a Meaningful Yield Advantage
EM Real Yield vs. U.S. and Europe
Source: Bloomberg, JPMorgan, as of May 21, 2025. EM Real Yields based on the current GBI-EM Global country universe, excluding Dominican Republic, Serbia, Turkey and Uruguay; based on GBI-EM Yields minus historical CPI for each country, and their current normalized GBI-EM GD Index weight fixed through time. U.S. real yield as measured by difference between U.S. five-year bond yield of the generic Bloomberg index and U.S. CPI Urban Consumers YoY NSA; Germany real yield is measured by the difference between German five-year bond yield of the generic Bloomberg index and Germany CPI. All items YoY.
In Sum…
Periods of dollar weakness have historically coincided with the outperformance of EM local debt, which could benefit from still low investor positioning after three years of outflows. The strong fundamentals of EM local debt, combined with a more favorable U.S. dollar and oil backdrop, present a case for renewed interest in the asset class.
