Investors Shift to Emerging Market Debt as Trump Tariffs Impact U.S. Treasury Bonds

Pedestrians walk past an Itau Unibanco Holding SA bank branch in Sao Paulo, Brazil. Patricia Monteiro/Bloomberg | Bloomberg | Getty Images

Investors have been piling into emerging market bonds as Treasurys’ long-held reputation as a safe haven took a beating following U.S. President Donald Trump’s “reciprocal” tariffs. Emerging market local currency bond yields slid by 13 basis points between April 2 — when Trump announced the tariffs — and April 25, according to the most recent data provided by JPMorgan. In contrast, the benchmark 10-year Treasury yield rose by more than 7 basis points during the same period.

“We are seeing that pickup into emerging market fixed income assets,” said Brandywine Global Investment Management’s portfolio manager Carol Lye, adding that Mexico, Brazil, and South Africa were among the countries likely to see more demand for their bonds. As these bonds are priced in the domestic currency, overseas investors’ purchases also increase the demand for the local currency.

“The real yields are still very high. So that premium pays us to be there [in emerging markets], and the currencies are also benefiting from that shift out of the dollar,” Lye said. This is part of an effort by investors to diversify away from the U.S. market, particularly local investors.

Mark Mobius, chairman of Mobius Emerging Opportunities Fund, remarked, “This is an effort by investors to diversify away from the U.S. market, particularly local investors,” adding that domestic investors of emerging markets are likely among those rotating out from U.S. Treasurys into these fixed-income assets due to their exposure to the local currency.

The U.S. Treasurys sell-off also saw a rush toward alternative safe-haven assets such as Euro bonds and Japanese government bonds, but given they are developed markets, that rotation is not unusual, said experts.

‘New lens’ of viewing emerging market assets

What has surprised investors about emerging markets is the common narrative that they “won’t be holding up” with an impending U.S. recession, said Brandywine’s Lye. “I think a lot of people are being proven wrong because they are [holding up],” she said, adding that there are enough fiscal buffers and monetary space with some of these countries to offset growth concerns.

Other market watchers noted that emerging market local currency fixed income tends to fare better than its counterparts when the greenback is under pressure. “In an environment of a weaker U.S. dollar, lower commodity prices, and global rate relief, EM local currency fixed income would tend to outperform most other fixed-income assets,” said Tadas Gedminas, vice president of the investment bank’s global emerging market strategy research team.

Investors, particularly those in the U.S., are beginning to view emerging markets through an “entirely new lens,” said Paul Benson, head of systematic fixed income at Insight Investment. In the past, when U.S. investors tried to invest overseas in emerging market bonds, they often lost money once the dollar strengthened. A strong dollar shrinks the profits from investments made in other currencies.

“But the Sturm und Drang of 2025 has finally turned the tables,” he continued, adding that the relative underperformance of U.S. risk assets and even typical safe havens like the greenback and Treasurys has piqued domestic investors’ interest in opportunities abroad.

Aberdeen Investments’ director of fixed income Viktor Szabó noted that while he favors emerging market local currency bonds, it is still “early days” to determine exactly where global investors are rotating their bond positions. Aberdeen also observed that rather than pulling out from U.S. sovereign debt outright, some investors have rotated from long-dated bonds to short-duration ones like the 2-year Treasurys.

U.S. 2-year Treasury yields fell in the days following Trump’s April 2 tariffs, while the 30-year Treasury yield saw a spike of over 30 basis points within a week. The benchmark 10-year yield also rose by 30 basis points. “We have been living in a world where U.S. Treasurys were the ultimate safe asset for a very long time; should this notion change, many investors would have to completely rethink their asset allocation,” Benson concluded.