Emerging Markets: Investors Shift Global Risks to Local Bets
- Investors in fixed income are increasingly turning to bonds in the local currencies of lesser-known emerging markets, seeking higher yields and reduced risk.
- Some have acquired bonds in Jamaican dollars, Dominican Republic pesos, Pakistani rupees, and Zambian kwacha.
- Fund managers are increasingly venturing beyond customary benchmark indices, accepting uncovered exchange rate risk in pursuit of attractive fixed-income yields.their focus is on markets relatively insulated from the...
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Emerging Market Bonds Attract Investors Seeking high Yields
Table of Contents
- Emerging Market Bonds Attract Investors Seeking high Yields
- Emerging Market Bonds: Your Q&A Guide to High Yields
Investors in fixed income are increasingly turning to bonds in the local currencies of lesser-known emerging markets, seeking higher yields and reduced risk.
Firms are strategically investing in diverse currencies. Some have acquired bonds in Jamaican dollars, Dominican Republic pesos, Pakistani rupees, and Zambian kwacha. Others maintain holdings in Kazakh tenge, evaluate notes in Ugandan shillings, analyze bonds in Uzbek som, and have added debt in Serbian dinars to their portfolios.
Fund managers are increasingly venturing beyond customary benchmark indices, accepting uncovered exchange rate risk in pursuit of attractive fixed-income yields.their focus is on markets relatively insulated from the global economy, drawn by local factors such as growth, reforms, or elevated interest rates.
We have a combination of currencies that we consider very undervalued with interest rates and very high carry.They tend not to be correlated with global markets, and that is their greatest advantage.Marcelo Assalin, head of emerging market debt at William Blair
Historically, investors diversifying into frontier countries often purchased sovereign bonds in U.S. dollars to mitigate exchange rate risks, limiting themselves to benchmark rates. This trend is shifting as investors explore unconventional markets for high yields and protection against global volatility.
Though, this strategy carries a cost: investors are exchanging global risks for local risks.These less-familiar markets often suffer from low liquidity, potentially trapping investors during sudden downturns. Unexpected political and economic events can quickly turn profits into losses. Furthermore,the limited size of these markets restricts investment opportunities.
You have to be selective and do a deep examination because these markets are less known and have less coverage.aurelie Martin, economist and investment analyst at Ninene One
Portfolio Composition
Fund managers making these unconventional investments are not necessarily abandoning traditional emerging markets.
Actually, local currency bonds from larger emerging economies have driven profits this year. Brazil, Mexico, and Chile have seen double-digit returns, propelling a key benchmark index to its best start since 2023. Countries with high interest rates, such as Egypt with rates exceeding 20%, are attracting carry trade activity.
Returns in lesser-known frontier markets have been more modest. One exchange-traded fund (ETF) with holdings in smaller nations has increased by 4.3% as the start of 2025. While this is more than double the profits of a broad emerging market index, it remains considerably below the returns seen in Brazil, where investors have gained 16%.
Diversification remains a key justification for exploring less traditional markets.
Isolation as Attractive
With minimal correlation to global markets, frontier nations can avoid contagion effects, an advantage as investors anticipate increased volatility in the coming months.
One analyst noted that investing in frontier markets is not necessarily a bet against the U.S. dollar. You have to trust the currency to enter the operation.
Currently, larger markets like Brazil are benefiting from the dollar’s weakness.A strengthening dollar could trigger significant capital outflows. Conversely, funds anticipate substantial yields in frontier markets that can offset potential exchange losses and sustain profitability.
Attractive Yields
For example, Uzbekistan offers a 17% coupon on its bonds in som, expiring in September 2034. Kazakhstan’s note, expiring in March 2035, pays 10.25% interest, while Jamaica’s five-year bond offers an annual rate of 11.875%.
One sovereign analyst noted positive momentum in Uzbekistan,citing reforms and improvements in credit fundamentals.The currency has a credible controlled sliding system and bond yields are attractive even after adjusting for the possible exchange depreciation.
However, the risk of sharp currency declines remains. The recent political crisis in Turkey highlights how even established emerging markets can experience unforeseen setbacks.
Emerging Market Bonds: Your Q&A Guide to High Yields
Updated: March 23, 2025
In today’s fixed-income landscape, investors are increasingly turning to emerging market bonds. This Q&A-style guide provides insights into these opportunities, examining their potential, risks, adn how they compare to customary investments.
What Are Emerging Market bonds?
Emerging market bonds are debt instruments issued by governments and corporations in developing or emerging economies. These bonds can be denominated in the local currency of the issuing country or in a more widely traded currency like the U.S. dollar.
Why Are Emerging Market Bonds Attractive Now?
Investors are drawn to emerging market bonds for the higher yields they offer compared to those of developed markets. The search for yield is driving interest in countries previously considered frontier markets, with the potential for returns that may offset potential exchange rate losses. fund managers are increasingly investing in the local currencies of lesser-known emerging markets, seeking higher yields and reduced risk.
As Marcelo Assalin,head of emerging market debt at William Blair,states,”we have a combination of currencies that we consider very undervalued with interest rates and very high carry… They tend not to be correlated with global markets, and that is their greatest advantage.”
What Are the Risks of Investing in Emerging Market Bonds?
While perhaps offering high returns, investing in emerging market bonds comes with risks:
- Currency Risk: The value of the bond’s interest payments and principal repayment can fluctuate significantly depending on the exchange rate between the bond’s currency and the investor’s home currency. A strengthening dollar could trigger significant capital outflows.
- Political Risk: Political instability or policy changes can significantly impact the value of bonds. Unexpected political and economic events can quickly turn profits into losses.
The recent political crisis in Turkey highlights the impact of unforeseen setbacks, even in established emerging market bonds.
- Liquidity Risk: Some emerging markets have less liquid bond markets, making it difficult to buy or sell bonds quickly at a fair price. These less-familiar markets often suffer from low liquidity,potentially trapping investors during sudden downturns.
- Economic Risk: Economic downturns or financial crises in the issuing country can lead to defaults or lower bond values.
- Market Size: The limited size of these markets restricts investment opportunities.
Are Frontier Market Bonds a Good Investment?
Frontier markets—those even less developed than emerging markets—are attracting attention due to the potential for higher returns and minimal correlation to global markets. This is a strategy that comes with costs, as investors exchange global risks for local risks.
How Do Emerging Market Bonds Perform?
performance varies significantly based on several factors. Local currency bonds from larger emerging economies, such as Brazil, Mexico, and Chile, have seen double-digit returns. Conversely,countries with high interest rates are attracting carry trade activity,like Egypt with rates exceeding 20%. A broad emerging market index has had its best start since 2023. As of early 2025,a frontier market ETF increased by 4.3%,which is more than double the profits of a broad emerging market index,but considerably below returns seen in Brazil.
Where Can I Find High Yields in Emerging Market Bonds?
several markets offer attractive yields. examples include:
- Uzbekistan: offers a 17% coupon on bonds in som, expiring in September 2034.
- Kazakhstan: Notes expiring in March 2035, pay 10.25% interest.
- Jamaica: Offers a five-year bond with an annual rate of 11.875%.
A sovereign analyst noted positive momentum in Uzbekistan, citing reforms and credit improvements. The analyst also notes the currency has a credible controlled sliding system and considers the bond yields attractive, even after accounting for potential exchange depreciation.
Emerging market Bonds vs. Traditional Investments
Emerging market bonds can provide diversification and potentially higher returns than more traditional fixed-income investments. though, investors must be prepared for the added risks.
| Investment | Potential Benefits | Potential Risks |
|---|---|---|
| Emerging Market Bonds | Higher yields, diversification, potential for currency appreciation, minimal correlation to global markets. | Currency risk, political risk, liquidity risk, economic risk, market size. |
| Developed Market Bonds | Lower risk, greater stability, higher liquidity. | Lower yields, less potential for capital appreciation. |
Diversification remains a key justification for exploring less traditional markets.
Who Should Invest In Emerging Market Bonds?
emerging market bonds may be suitable for investors with a higher risk tolerance who are seeking diversification and higher potential returns. Investors should be prepared to accept currency fluctuations and market volatility. As Aurelie Martin, economist and investment analyst at Ninene One, says, You have to be selective and do a deep examination as these markets are less known and have less coverage.
Before investing, consider your own risk tolerance, and financial goals, and consult with a financial advisor.