(Bloomberg) -- What started as a promising year for emerging-market local debt is quickly souring as a strong dollar and a barrage of US tariffs have fund managers rethinking one of their main bets for developing assets.
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In the wake of a hawkish Federal Reserve — after pausing interest rate cuts on Wednesday, Chair Jerome Powell said officials are not “in a hurry” to lower — investors are skeptical that a turning point is near. Chile, Sri Lanka and Hungary all held rates last week, citing resurgent inflation risks.
The impact of President Donald Trump’s trade war on the greenback and the global economy is complicating the outlook for emerging markets. Canada and Mexico vowed to hit back after Trump imposed 25% tariffs on imports of their goods, while China vowed “corresponding countermeasures” to his 10% levy on Chinese products.
Even before the tariff threats materialized this weekend, some money managers including Loomis Sayles were already slashing exposure to local-currency bonds from developing nations, which outperformed their dollar-denominated peers at the beginning of 2025. The firm is favoring hard-currency debt in the developing world.
“I’m finding it hard to be excited about EM local,” said Amer Bisat, a managing director and head of emerging markets fixed income at BlackRock Inc. “Without having a directional view on where rates and the US dollar are going to go, the reality is we’re hostages at this stage.”
The caution is evident in recent fund flows and activity from short sellers. Despite small inflows in the past week, investors have pulled nearly a billion from local currency bond funds so far this year, with the biggest outflows during the first week of Trump’s administration. Meanwhile, US short sellers are making the biggest bets in two years against local-currency sovereign bonds in emerging markets in a popular exchange-traded fund.
The yields in local-currency bonds in developing economies are finding hard competition with US Treasuries or hard-currency debt. The average yield for local-currency emerging sovereign bonds has been below that of US Treasuries for the past eight weeks, according to data compiled by Bloomberg.
“There is a concrete case favoring hard over local currency bonds on a risk-adjusted basis,” said Peter Yanulis, who co-manages Loomis Sayles’ EM debt blended total return strategy. “It’s too early to call the turning point.”