Emerging Market Bonds Outperform U.S. Treasuries as Carry Trade Heats Up
Claire Weston
Since late March, EM local-currency sovereign debt has returned 3.7% while comparable Treasuries posted a small loss; yields diverged sharply, drawing a wave of carry-trade capital — but Asia got left behind.
EM debt vs. Treasuries — who is winning?
The Bloomberg EM local-currency sovereign bond index has returned 3.7% since late March; a comparable U.S. Treasury index posted a small loss over the same period.
Average EM bond yields fell 26 basis points, while Treasury yields rose 30 bp — a clear divergence.
This means → capital is flowing out of Treasuries and into EM debt, with both price and yield confirming the trend.
Why are investors willing to shift money over?
Average EM bond yields now sit at 6.23%, while Q2 average EM inflation has dropped to 2.77% — more than 5 percentage points below its 2024 peak.
In plain terms = nominal interest is high, inflation is low, so the real return investors pocket after inflation remains generous — a built-in cushion.
Goldman Sachs chief FX and EM strategist Kamakshya Trivedi credits improving fundamentals: "Monetary-policy credibility, current-account deficit narrowing, FX reserve accumulation — they're all working together."
What is a carry trade, and why is it heating up now?
A carry trade — borrowing in a low-rate currency and investing in higher-yielding assets to capture the spread — is accelerating as this yield gap widens.
Brad Godfrey, co-head of EM debt at Morgan Stanley Investment Management, oversees roughly $35 billion. He says "investors are still looking to reduce their overweight to U.S. capital markets."
This reflects a deeper signal: concentrated positioning in dollar assets is being actively diversified, with EM debt emerging as a primary destination.
Who profited the most — and who actually lost?
Goldman highlights Colombia, Hungary, South Africa, and Brazil. Since March, Colombia and Hungary each delivered over 21% total return, South Africa 14%, Brazil 6%; Egypt, not in the index, also topped 20%.
Asia lagged: Indonesia, South Korea, and the Philippines posted losses — dragged by relatively low yields and heavy oil-import dependence.
Citi analyst Luis Costa expects Latin American, Eastern European, Middle Eastern, and African local-currency debt to keep outperforming Asia, citing hawkish central banks, high real yields, and ample FX reserves that limit currency depreciation.
How are institutional players positioning?
Shamaila Khan, head of global EM at UBS Asset Management, says positions were "flushed out" after the Iran war erupted; she then pivoted to a more aggressive stance.
BlackRock's research arm upgraded EM debt to overweight after holding a neutral view for about a year; strategist Wei Li and colleagues told clients that "yields are attractive relative to volatility, and fundamentals keep improving."
This means → large institutions are shifting in unison from neutral or underweight to overweight — the support behind inflows is upgrading from scattered conviction to collective action.
Can this rally last?
The Bloomberg 19-country EM debt index is on track for a second consecutive year of outperforming U.S. Treasuries.
Yet Asia's persistent underperformance is a reminder: the winners in this rally are heavily concentrated in high-real-yield regions, and the divergence is stark.
Put simply = EM debt as a whole is winning, but not every emerging market is winning — whether that divergence narrows is the key question for the next leg.
Content is for reference only, not financial advice.