By BloombergLast Updated: Sep 21, 2026, 04:54:00 AM IST

Synopsis

Current trends indicate that investors are leaning towards local emerging market debt rather than dollar-denominated bonds. The allure of attractive valuations combined with ongoing carry trades fuels this shift in strategy. Fund inflows and performance metrics distinctly reflect this investor inclination. Nonetheless, potential rate hikes by the Federal Reserve could pose challenges to this emerging market approach, while a stronger dollar may discourage investments in local currency debt.

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.

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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.

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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.

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