Emerging market (EM) local currency debt was the best performing major fixed income sector in 2025, up almost 20% on the year (Source: JPMorgan as of 31st December 2025). While these returns were similar to those produced by global equities, they were achieved with significantly less volatility. The MSCI World Index was actually nearly three times as volatile. Given this performance, the question that I am continually asked is: “Have I missed the trade?”
The changing nature of the EM local market
Although returns in 2025 may have captured attention, ongoing structural changes have been boosting the appeal of EM local currency debt for many years. As emerging economies develop, EM governments have been transitioning their bond issuance from hard currency (US dollar) to local currencies. From the perspective of EM governments, this shift makes sense. Government spending, in areas such as infrastructure, education, healthcare and defence, is in local currencies, so by issuing bonds in their local currency EM governments can more closely match their spending and borrowing needs.
However, EM governments can only issue bonds in their own local currency if there is sufficient demand. So far, increased local currency issuance has been met by the rise of domestic institutional buyers. As these EM pension funds, insurance companies, banks and wealth managers have flourished in recent years, they have bought more of their own government debt in the process. By holding local currency bonds, domestic EM institutions can better match their future obligations—whether pension liabilities, insurance contracts or deposits—with assets in their local-denominated currency. And due to the nature of these obligations, domestic buyers also tend to invest for the long-term. It can be reasonably expected that they won’t automatically sell in times of hardship.
For global investors, the emergence of domestic institutional buyers means there is now strong underlying support for EM local currency bonds. At the same time, the growing breadth and scale of the EM local currency market is creating compelling opportunities.
At its inception in 2005, the EM local currency debt market was biased towards emerging Europe, in countries such as the Czech Republic, Hungary and Slovakia. Through the 2000s, Latin America’s index weight increased, due to growing issuance from the likes of Brazil, Peru and Colombia. And more recently the universe has evolved again, as large Asian countries such as China, India and Indonesia have become more prevalent in the index. Today, at over $6.5 trillion in size and consisting of all the most established emerging market economies, the EM local market accounts for around 10% of the global fixed income market, providing an abundance of opportunities for active investors to generate alpha.
Integrating EM local currency debt into portfolios
As issuance increases, and EM local’s share of global fixed income markets grows, the asset class is becoming a core part of investors’ portfolios. Investors are also being attracted by headline yields above 6% for the industry standard index. However, it is the diversification benefits that EM local currency bonds bring to a portfolio that are perhaps most compelling.
As EM central banks become more independent, local currency bonds are starting to produce idiosyncratic returns compared to other fixed income sectors. Traditionally, the more “risky” areas of the fixed income market, such as high yield, tend to be highly correlated with equities. Similarly, “core” fixed income assets, such as global aggregate bonds or investment grade corporate bonds, tend to have a high correlation with Treasuries. EM local currency debt, by contrast, provides a source of diversification for both equity and fixed income investors. In 2022, for example, when a spike in inflation led to an increase in the correlation between global equities and bonds, it is notable that EM local currency bonds outperformed both equities and the broader fixed income market.
Positioning our portfolio
Inflation has reduced significantly over 2025 for EM countries and is now back to target levels. Rates, however, remain high, and we estimate that EM central banks are only halfway through their cutting cycles.
As a result, real rates remain high. We are long duration in the countries where we believe central banks have most ability, and are most willing, to cut policy rates, such as South Africa and Mexico. We are being more tactical in countries with upcoming fiscal and political risks, such as Brazil and Colombia.
EM local is more than a trade
Emerging markets are already off to a flying start this year. 2026 may not bring the near 20% returns we saw last year but we think returns of around 10% are achievable in the current market environment. Given the changing nature of the market, however, we believe EM local has so much more to offer than one or two years of good returns. For investors looking for global diversification, EM local currency government debt can serve as a core part of their fixed income portfolio exposure, if it doesn’t already.
EM local isn’t just a trade, it’s an investment. EM local is more than a tactical opportunity, it’s a strategic allocation for investors looking to enhance the returns of their portfolio while also improving diversification. The size, liquidity and appeal of the market should mean that EM local is no longer just an occasional off-benchmark allocation. EM local delivered for investors last year, and I expect the asset class to continue delivering long into the future.