Wall Street Misses Out on Unexpected Rally in Local EM Bonds

Wall Street has been caught by surprise by a rally in local emerging-market debt, an asset class that’s been largely abandoned by foreign investors after a decade of underperformance.

Domestic-currency bonds are this year’s developing-world winners, handing money managers far stronger returns than hard-currency debt or equities, according to data compiled by Bloomberg. BlackRock Inc. has started calling local notes an attractive bet, while strategists from JPMorgan Chase & Co. lauded them as the “star” fixed-income segment of 2023.

So far this year, domestic bonds from Colombia, Hungary, Brazil, Mexico, Peru, and Poland have given double-digit returns to holders — many of whom are local.

Overseas Investors Own Less Local EM Debt | Share of foreign ownership lingers below 10% in India, Brazil

Resident investors have taken center stage in recent years as overseas money managers pulled out of riskier bets. Foreign ownership of local debt fell to historic lows in the fourth quarter, capping an exodus that spanned the Covid pandemic, Russia’s invasion of Ukraine, and the world’s most-recent interest-rate hiking cycle.

“Clearly, anyone reducing in the fourth quarter of last year should have held on,” said Kieran Curtis, director of investment at abrdn in London. “We knew inflation and monetary policy would be peaking over the longer term and certain key countries have had swings in current accounts from deficits to surpluses.”