Investors are rotating out of dollar-denominated emerging-market debt and into local-currency bonds, which have delivered far stronger returns in 2025. Domestic pension funds, banks, and insurers have replaced foreign investors as the dominant holders in markets like Mexico and Indonesia, and JPMorgan is launching a separate frontier-market local-currency bond index.
Local-currency emerging-market bonds have become the preferred trade over dollar-denominated EM debt as rising US Treasury yields weigh on hard-currency issuance. The $6.7 trillion local-currency bond universe has delivered returns between 9% and 19% in USD terms across major indices in 2025. That marks the asset class's best performance since 2019.
Domestic buyers replace foreign capital
The shift traces back to who now holds the debt. Foreign ownership of Mexican local-currency bonds has dropped to roughly 11%, down from 29% since early 2020. Indonesia shows a similar pattern, with foreign holders now accounting for about 13% of local-currency bonds, compared with nearly 40% over the same period.
Pension funds, banks, and insurance companies have absorbed that gap, and these buyers tend to hold bonds to maturity rather than sell into a risk-off event. The same pattern has played out in Brazil, India, and South Africa, where domestic players have taken up most new issuance.
Why dollar-denominated debt is losing ground
Rising Treasury yields hit dollar-denominated EM bonds twice: prices fall alongside other fixed-income assets tied to Treasuries, and the spread that once made them attractive compresses against risk-free US government debt. The local-currency market is more than six times the size of the roughly $1 trillion hard-currency sovereign and corporate debt universe as of August 2025.
JPMorgan launches a frontier-debt index
JPMorgan has announced its GBI-EM Edge frontier local-currency government bond index, set for launch by the end of September 2026. The index will track approximately $330 billion in debt across 26 countries. Africa carries around 45% of the weighting, and the index's average nominal yield sits at roughly 10.4%. JPMorgan's existing GBI-EM Global Diversified index returned 0.90% in USD terms in August 2026, reflecting broader dollar weakness and continued inflows into local-currency EM bond funds.
What could sustain the trend
Three factors underpin the case for local-currency EM debt: the degree of domestic institutional ownership, which tends to lower volatility and stabilize demand; real yields, which remain historically generous after many EM central banks hiked rates aggressively to fight post-pandemic inflation; and currency valuations, as many EM currencies remain undervalued on a purchasing-power-parity basis. Local ownership has replaced foreign investor sentiment as the variable that matters most for market resilience.
Source: Crypto Briefing
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