Pedestrians walk past an Itau Unibanco Holding SA bank branch in Sao Paulo, Brazil.
Patricia Monteiro/Bloomberg | Bloomberg | Getty Images
Investors have been piling into emerging market bonds as Treasurys’ long-held reputation as a safe haven took a beating following U.S. President Donald Trump’s “reciprocal” tariffs.
Emerging market local currency bond yields slid by 13 basis points between April 2 — when Trump announced the tariffs — and April 25, according to the most recent data provided by JPMorgan. In contrast, the benchmark 10-year Treasury yield rose by more than 7 basis points during the same period.
“We are seeing that pickup into emerging market fixed income assets,” said Brandywine Global Investment Management’s portfolio manager Carol Lye, adding that that Mexico, Brazil and South Africa were some of the countries that could see more demand for their bonds.
As these bonds are priced in the domestic currency, overseas investors’ purchases also increases the demand for the local currency.
“The real yields are still very high. So that premium pays us to be there [emerging markets], and the currencies are also benefiting from that shift out of the dollar story,” Lye said.
This is an effort by investors to diversify away from the U.S. market, particularly local investors.
Mark Mobius
Mobius Emerging Opportunities Fund
“This is an effort by investors to diversify away from the U.S. market, particularly local investors,” said Mark Mobius, chairman of Mobius Emerging Opportunities Fund, adding that domestic investors of emerging markets likely to be among those rotating out from U.S. Treasurys into these fixed income assets due to their exposure to the local currency.
The U.S. Treasurys sell-off also saw a rush toward alternate safe-haven assets such as Euro bonds and Japanese government bonds, but given they are developed markets that rotation was not an unusual occurrence, said experts.
‘New lens’ of viewing emerging market assets
What’s surprised investors about emerging markets is the common narrative and expectations that they “won’t be holding up” with an impending U.S. recession, said Brandywine’s Lye.
“I think a lot of people are being proven wrong, because they are [holding up],” she said, adding that there’s enough fiscal buffers and monetary space with some of these countries to offset growth concerns.
Other market watchers noted that emerging market local currency fixed income tends to fare better than other counterparts when the greenback is under pressure.
“In a market environment of a weaker U.S. dollar, lower commodity prices, and global rate relief, EM local currency fixed income would tend to outperform most other fixed income assets,” said Tadas Gedminas, vice president of the investment bank’s global emerging market strategy research team.
U.S. 10 year Treasurys year-to-date
Investors, particularly those in the U.S., are beginning to view emerging markets through an “entirely new lens,” said Paul Benson, head of systematic fixed income at Insight Investment.
In the past, when U.S. investors tried to invest overseas such as in emerging market bonds, they often lost money once the dollar strengthened, Benson said. A strong dollar shrinks the profits from investments made in other currencies.
“But the Sturm und Drang of 2025 has finally turned the tables,” he said, adding that the relative underperformance of U.S. risk assets and even typical safe havens such as the greenback and Treasurys has intrigued domestic investors about opportunities they may be missing abroad.
Aberdeen Investments’ director of fixed income Viktor Szabó, said that while he likes emerging market local currency bonds, it is still “early days” to determine exactly where global investors are rotating their bond positions. Aberdeen also noted that rather than pulling out from U.S. sovereign debt outright, some investors have rotated from the long-dated bonds to short-duration ones like the 2-year Treasurys.
U.S. 2-year Treasury yields fell in the days that followed Trump’s April 2 tariffs while the 30-year Treasury yield saw a more than 30 basis points spike within a week. The benchmark 10-year yield also rose by 30 basis points.
“We have been living in a world where U.S. Treasurys were the ultimate safe asset for a very long time, should this notion change, many investors would have to completely rethink their asset allocation,” Benson said.
