Debunking the Myths of Emerging Markets Local Currency Debt

EM local-currency debt offers a larger, higher-quality and more diversified opportunity set than its reputation suggests, making under-allocation a greater risk than exposure.

• Roughly 70% of the JP Morgan GBI-EM Global Diversified Index is investment grade, with no eligible sovereign rated below BB; the index covers 20 countries and is expected to reach 22 in 2027.
• The EM local-currency bond universe grew from $10.5 trillion in 2010 to $46.2 trillion, exceeding the $30.9 trillion U.S. Aggregate and the $30.2 trillion non-USD developed-market universe; excluding China, it still reached $17.7 trillion.
• Since the Global Financial Crisis, the number of emerging-market central banks using formal inflation targets has roughly doubled, while fiscal rules and macroprudential measures have strengthened, helping contain inflation expectations and support real yields.
• Over the past decade, GBI-EM returned 2.62% annually versus -1.57% for the Bloomberg Global Aggregate DM ex-USD Index and 1.48% for the U.S. Aggregate; its correlation with the U.S. Aggregate was 0.55 versus 0.72 for developed markets outside the U.S.
• From 2008 through September 2026, while the DXY rose 32%, GBI-EM returned 64.9% compared with 36.5% for the Global Aggregate, showing that dollar strength has not necessarily overwhelmed local-currency returns.

Takeaway: Investors should reassess the assumption that emerging-market local debt is uniformly low quality, illiquid and highly correlated with developed markets; a dedicated allocation may improve global bond-portfolio returns and volatility, although country-level differences still require active selection.