Emerging Bonds Disrupt Playbook by Rallying as Treasuries Swoon

The old playbook of selling emerging-market bonds when Treasury yields spike is being upended by the positive dynamics favoring developing-nation debt.

Emerging bonds denominated in local currencies have extended this year’s rally — even as Treasuries slide — amid growing expectations for interest-rate cuts and optimism over a soft landing for the global economy. The correlation between emerging and US yields has dropped to almost zero, a Bloomberg study shows.

“The disinflation process in emerging markets is proceeding faster than we had previously expected — this should allow EM central banks to cut rates sooner and faster than developed-market ones,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management in London. “We remain overweight EM local-currency bonds.”

Emerging Market Bond Yields Diverge From Treasuries

While the Federal Reserve and many of its developed-nation peers have left the door open for further rate hikes, some of their emerging-market counterparts have already started to cut borrowing costs.