Bond Bulletin

Bond Bulletin: EM local currency debt’s emergence from hibernation

Bond Bulletin
Bond Bulletin
GFICC Investors

Published: 1 day ago

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.

Many global investors have snoozed on the emerging market (EM) local currency debt asset class over the past few years. With rejuvenated momentum, we believe EM local is ready for a big year in 2025.

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Fundamentals

Holistically, emerging markets have been doing a great job recently. Central banks have normalised inflation and economic growth continues to outpace developed markets. While all of this sounds great for EM, the geopolitical situation presents challenges. The risk of negative headlines has deterred investors from the asset class with uncertainty over who the next target of US tariffs may be. Yet, this is not an EM only problem. China and Mexico, staples of most EM portfolios, have been hit with tariffs but so too have Europe and Canada. Therefore, it could be argued that emerging markets are in the same position as most developed markets. It is possible to go further and recognise the flourishing consumer base of larger emerging market economies – which are less affected by geopolitical influences – and say that EM economies may be in a better position than their developed market counterparts to weather current uncertainties.

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Quantitative valuations

To combat rising inflation following the Covid pandemic, EM central banks were quick to hike interest rates and did so much more aggressively than developed markets. As inflation subsided, this in turn allowed EM central banks to start cutting rates earlier and more significantly. The pace of cuts slowed towards the end of 2024, with inflation nearing its target and geopolitical uncertainties looming. This situation provides investors with an opportunity to enter the market while yields remain attractive and before they start declining again. Even when adjusted from the associated risk that investors believe comes from EM, yields look incredibly compelling at current levels.

EM local is offering attracting risk-adjusted yields compared to other government securities

EM local is offering attracting risk-adjusted yields compared to other government securities

Source: J.P. Morgan Asset Management, Bloomberg, as of 7 March 2025. EM Local Currency: JPM GBI-EM Global Diversified Composite LOC. US Treasury: JPM GBI US. Euro Treasury: JPM GBI EMU. Indices do not include fees or operating expenses. Past performance is not a reliable indicator of current and future results

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Technicals

Between 2021 and 2024, investors withdrew an average of $4.7 billion a year from EM local dedicated funds. 2025 started with the same trajectory, but we have seen a reversal in March with $630 million of net inflows. Issuance continues to grow with the asset class now over $5 trillion in size, based on securities within the market standard JPMorgan GBI-EM benchmark. Including off benchmark securities, some market participants estimate the asset class to be around $20 trillion. The question therefore arises about who has been buying this debt. As EM economies have developed, pension funds, life insurance companies and local banks have stepped in to buy local currency debt. This is logical as their obligations, whether through pension liabilities, insurance contracts or deposits, are in their local currencies. The impact of this for global investors is that there is now a growing foundation of support for EM local currency bonds. Domestic investors tend to be long-term investors and, as such, if global uncertainties arise, it can be reasonably expected that they won’t be selling their own government bonds in times of hardship.

What does this mean for fixed income investors?

While EM fundamentals exhibit resilience, they will be rigorously tested as US policy shifts come into play. Inflation in emerging markets is expected to remain stable and yields have room to decline. Navigating the asset class is increasingly complex given the current macroeconomic environment and investors should not view EM local as a beta asset class. Though it has become easier to access with a multitude of different investment vehicles available to invest into the market, the ability to gain exposure to the asset class is not the same as actively allocating to it. We expect EM governments to continue increasing their local debt issuance over time and the stability of these markets will be supported by domestic buyers. The increasing amount of issuance in the market will in turn lead the asset class to be more important on the global fixed income stage.

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.



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GFICC Investors

Published: 1 day ago

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.