Threat to US Exceptionalism Spurs Rush for Emerging Local Bonds

The global investment landscape in 2025 is undergoing a quiet revolution. As the U.S. economy faces mounting headwinds—from trade tensions to geopolitical realignments—investors are increasingly turning to emerging market (EM) local currency bonds. Driven by currency appreciation, high real yields, and structural shifts in global trade, this shift marks a pivotal moment in the post-pandemic era. Yet, it is not without risks.

The Rise of EM Local Currency Bonds: A Structural Shift

Emerging markets’ local currency bonds (LCBs) have emerged as a compelling alternative to U.S. assets. In March 2025, the J.P. Morgan GBI-EM index rose 1.5%, fueled by a weaker U.S. dollar and surging EM currencies. Central European currencies like the Polish zloty and Hungarian forint gained traction as the eurozone’s economic recovery bolstered regional stability. Meanwhile, Brazil’s real surged after the central bank signaled a hawkish stance, while Colombia and Chile saw their currencies appreciate amid improving fiscal policies.

The appeal of LCBs lies in their combination of high yields and undervalued currencies. Franklin Templeton, for instance, has allocated to hard currency debt in Indonesia, the Philippines, and South Korea, benefiting from their liquidity and market access. These markets now offer real yields of 5–7%, far exceeding the 2% yields in developed markets.

Challenges and Risks: When Politics and Policy Collide

Yet, the path is not without potholes. Turkey’s local assets faced a steep sell-off in early 2025 due to political crackdowns, underscoring the fragility of EM markets. Meanwhile, high-yield EM hard currency debt underperformed in March, with assets in Lebanon and Ecuador pressured by election uncertainties and geopolitical strains.

The U.S. itself remains a wildcard. Its trade policies, particularly tariff threats, have created uncertainty for global capital flows. While some investors see value in EM post-price corrections, others like Payden & Rygel are increasing cash holdings to hedge against a potential U.S. rebound.

The Decline of U.S. Exceptionalism: A Structural Realignment

The U.S. has long been the “safe haven” for global capital, but its dominance is eroding. The MSCI ACWI index, which accounts for nearly two-thirds of global equity value, reflects a market overly concentrated in U.S. firms. This overexposure, combined with cyclical pressures like rising interest rates and slowing growth, is pushing investors toward diversification.

Geopolitical shifts amplify this trend. China’s technological advances—particularly in AI and semiconductors—are challenging the U.S. tech sector’s valuation premiums. Meanwhile, Europe’s recovery and India’s robust growth (driven by infrastructure spending and consumption) are creating pockets of opportunity.

Regional Breakdown: Winners and Losers

• Europe: While vulnerable to U.S. tariffs, European exporters could benefit from post-Ukraine reconstruction and Qatar’s LNG exports, which ease energy costs.
• India: Outperforms peers with an undervalued financial sector and underpenetrated domestic equity market, attracting capital fleeing China.
• China: Despite low valuations, long-term growth is constrained by debt and policy uncertainty.
• Japan: Corporate governance reforms and undervalued sectors like automotive present opportunities.

Expert Sentiment: The “Unwind” of U.S. Dominance

Investment firms like Ashmore Group predict a multi-decade shift away from U.S. equities as investors rebalance portfolios. Fixed income experts, including JPMorgan’s Bob Michele, highlight that “value is making a comeback” in EM bonds.

Conclusion: A New Era for Emerging Markets

The 2025 data paints a clear picture. EM local currency bonds, driven by high real yields and currency appreciation, are attracting capital as U.S. exceptionalism falters. The J.P. Morgan GBI-EM index’s 1.5% gain in March alone underscores this momentum. However, risks like political instability and U.S. policy volatility remain.

Looking ahead, structural factors favor EM. Lower debt levels, demographic tailwinds, and trade realignments will sustain investor interest. As Ashmore Group notes, this shift could redefine global capital flows for decades—a testament to the power of diversification in an increasingly multipolar world.

The rush into EM local bonds is not just a tactical move but a strategic realignment. For investors, the question is no longer whether to pivot but how to navigate the risks while capitalizing on this historic shift.