Investors Shift to Emerging Market Debt as U.S. Treasurys Lose Safe Haven Status Amid Trump Tariffs
Following U.S. President Donald Trump’s announcement of tariffs in early April 2025, there has been a significant shift in investment patterns, with more funds moving toward emerging market (EM) local currency bonds. As the U.S. Treasury market experienced a sell-off, the reputation of Treasurys as a safe haven was challenged, prompting investors to seek alternatives. Emerging market bonds, offering higher yields and a diversification opportunity, became an increasingly attractive option, drawing $2.4 billion in inflows since the tariff announcement.
Market data reveals a contrasting trend: while U.S. Treasury yields rose, emerging market bond yields fell, with a decrease of 13 basis points in local currency bond yields from April 2 to April 25. This shift is largely driven by investor interest in higher real yields offered by countries such as Mexico, Brazil, and South Africa. Carol Lye, a portfolio manager at Brandywine Global Investment Management, emphasized the growing demand for these bonds, noting the added benefit of currency appreciation as international investors flock to emerging markets.
According to Mark Mobius, chairman of Mobius Emerging Opportunities Fund, this move reflects an effort by investors, particularly local ones, to diversify away from U.S. assets. With bonds denominated in local currencies, overseas investment not only boosts demand for these bonds but also supports the local currencies, further increasing their appeal. Experts argue that the shift out of U.S. Treasurys toward emerging market bonds is part of a broader strategy to avoid U.S. assets that have underperformed due to the ongoing economic uncertainty.
Emerging market assets have defied previous expectations, especially with concerns about a potential U.S. recession. Brandywine’s Lye pointed out that emerging markets are proving resilient, with strong fiscal buffers and flexible monetary policies that help mitigate growth risks. This positive performance amid global uncertainties has led to a reevaluation of emerging market investments, with analysts suggesting that these assets could outperform other fixed income securities, especially when the U.S. dollar is weakening.
The evolving perception of emerging markets has intrigued U.S. investors, who are now viewing these assets with “an entirely new lens,” according to Paul Benson, head of systematic fixed income at Insight Investment. The relative underperformance of U.S. risk assets and even traditional safe havens like Treasurys and the greenback has led investors to explore opportunities in emerging markets. Despite the ongoing shift, some experts caution that it’s still too early to determine whether this trend will continue, as investors adjust their strategies in response to changing global dynamics.
Source: CNBC