In the Midst of Trump Chaos, EM Investors Can Hide Out With Global Rate Cut Bets

Investors in emerging markets are increasingly betting on falling global interest rates as a way to protect themselves from the market turbulence triggered by President Donald Trump’s escalating trade war. Their focus has shifted to local-currency bonds in developing nations, particularly where yields remain high and central banks are positioned to lower rates in response to a prolonged slowdown in global trade. Another version of this trade is through “receivers,” a strategy that profits if interest-rate swaps decline.

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This approach has delivered strong returns during recent market swings. As U.S. equities experienced sharp declines — the S&P 500 posted its biggest two-day drop since March 2020, losing approximately $5 trillion in value — emerging market local-government debt posted solid gains.

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An index tracking this sector had its best performance in nearly a month, building on gains accumulated since the start of the year. In countries like Brazil and Chile, interest-rate swaps registered their largest weekly drops since 2022.

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“The real opportunity right now lies in rates,” said Grant Webster, co-head of emerging market sovereign debt and currencies at investment firm Ninety One. “With the global outlook weakening, EM central banks will have a lot more flexibility to cut rates.”

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This trend reflects a broader pattern in which emerging market assets have remained relatively stable compared to the turmoil seen in developed markets. So far this year, a key index of emerging market stocks is up 1.1%, while the S&P 500 has dropped 14%. At the same time, emerging market currencies have risen by 1.7%, even as the U.S. dollar has declined 3.4%.

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Despite the strong performance, investors are approaching local-currency debt with caution. With markets showing extreme volatility, fund managers are sticking to selective bets in countries where policy flexibility and yields remain attractive — and they’re ready to exit quickly if those bets don’t perform.

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A central factor in the strategy’s success is the U.S. dollar’s recent weakness. Last week, the dollar briefly fell to its lowest level since October against a basket of other currencies amid concerns that Trump’s trade policies could weigh on U.S. economic growth. For American investors, a weaker dollar enhances returns from emerging market debt, which must be converted back into dollars upon sale.

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“For quite a while, emerging markets offered higher yields, but a strong dollar acted as a headwind,” Webster said. “These new tariffs may have been the first domino to fall and shift the trend.”

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Arif Joshi, co-head of emerging market debt at Lazard Asset Management, also believes that expectations of a declining dollar are increasing the appeal of local-currency bonds. He pointed out that in countries like Turkey, where inflation fears have driven residents to convert local savings into dollars, a weakening greenback eases these concerns. This, in turn, gives Turkey’s central bank more freedom to resume interest rate cuts, likely over the summer.

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Turkey’s 10-year government bond yield hovered around 32% on Friday, offering a high-return opportunity for investors. Joshi is also optimistic about Brazil and Mexico, where yields on 10-year bonds sit near 15% and 9%, respectively.

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Other fund managers are favoring Mexican government debt. Anders Faergemann, co-head of global fixed income for emerging markets at Pinebridge Investments, said Mexico’s Mbonos are attractive because there’s “room for Banxico to ease monetary policy further.” Yields on 10-year Mbonos dropped to their lowest levels since 2023 last Friday.

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At VanEck Associates, Eric Fine, who oversees emerging market active debt, sees the potential for U.S. growth to slow relative to the rest of the world as a clear signal to favor emerging market local bonds. He’s particularly optimistic about countries like Colombia and Chile.

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Still, this strategy isn’t without risks. Investors have previously placed their hopes on local-currency bonds only to see those expectations fall short. The success of the current wave of interest may ultimately depend on how severely the global economy is impacted. A deep U.S. recession could sap global risk appetite, causing investors to abandon riskier assets, including emerging markets. Conversely, if the U.S. economy proves more resilient than expected or if the Trump administration softens its tariff approach, the trade could unravel.

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Retaliatory moves from other nations add another layer of uncertainty. On Friday, the dollar regained some strength while emerging market currencies dipped after China announced a 34% tariff on all U.S. imports, effective April 10.

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Nevertheless, advocates of this emerging-market bond strategy remain hopeful that it can act as a temporary haven during times of heightened uncertainty. Tina Vandersteel, who heads emerging market debt at Grantham Mayo Van Otterloo & Co., remarked, “It would be ironic if EM local debt turns out to be the under-owned relative safe haven asset in all this.”

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