There Is No Clear Core

The traditional Core/Core Plus framework no longer provides a reliable defensive anchor because it concentrates portfolios in long-duration US sovereign risk.

• US Treasuries rose from less than one-quarter of the Bloomberg US Aggregate Bond Index in 2002 to roughly one-half today; including agency MBS and other government-related debt, about three-quarters of the index depends on the US government and its agencies.
• The Agg’s duration increased from around 4.5 years before the global financial crisis to about 6 years today, while US federal debt held by the public rose from about 25% of GDP in 1980 to about 100% today and is projected by the CBO to reach 120% by 2036.
• Treasuries still hedge growth shocks, but they offer less protection against inflation and fiscal shocks: in 2022, when US inflation peaked at 9.1%, the Agg fell about 13% while US equities fell about 18%; in April 2025, Treasuries, the dollar, and equities sold off together.
• Short-duration credit can diversify Treasury duration, while emerging-market local-currency debt is driven by roughly 20 domestic central banks, local rates, and currencies; hard-currency EMD retains six to seven years of Treasury-linked duration and the J.P. Morgan EMBI Global Diversified fell almost 18% in 2022.
• The diversification case is reinforced by sovereign stress elsewhere: French 10-year OAT yields reached their highest level since 2008 in the third quarter, the OAT-Bund spread exceeded 100 basis points, and the dollar’s share of allocated global reserves declined from about 71% in 1999 to roughly 57% in 2026.

Takeaway: Investors should treat EMD as a potential diversifier of US sovereign duration and fiscal risk, not merely as a return-seeking sleeve, and should actively manage duration, beta, country exposure, and the balance between hard and local currencies.