Global investors' retreat from EM bonds likely to be a boon

Emerging-market bonds are likely to be supported in 2026 as the securities are increasingly owned by local investors who are less exposed to currency risk and are therefore more resilient holders, fund managers say.

Domestic funds have taken on an increasing proportion of local-currency debt in recent years in countries such as China, Mexico and Indonesia as capital markets in those nations have deepened. Local pension funds and insurers in developing nations have also stepped up purchases to meet their growing liabilities.

The relative decline in foreign ownership is "one of the main reasons we are bullish on this asset class," said Didier Lambert, head of emerging market local-currency debt at JP Morgan Asset Management in London. "As EM economies increased issuance post Covid, a large share of that issuance was taken down by local banks and pension funds."


Lambert said he prefers local-currency debt from emerging economies with "large and deep local pockets, which allows them to stem volatility, such as Mexico, South Africa, Brazil, India and Thailand."

The decline in offshore ownership in some cases is quite stark. Foreign shareholdings of Mexican bonds have slipped to around 11% from 29% at the start of 2020, while that of Indonesia has fallen to around 13% from almost 40% in the same period. Emerging-market bonds enjoyed a stellar year in 2025. A Bloomberg index of the securities returned 9.3% last year, the best return since 2019. By comparison, a gauge of developed-market bonds gained 6.3%.

Greater local ownership means the impact of currency volatility is reduced. Global investors will typically hold their emerging-market bonds on an unhedged basis, meaning a decline in the local currency will sometimes see them reduce their stakes.

"Local buyers of bonds are usually not exposed to currency risk and tend to be more strategic, long-term holders," said Philip Fielding, a fund manager at Fidelity International in London. "It shows that financial markets are maturing and deepening."

Emerging-market bonds already tend to be less volatile than their developed-market peers. The yield change for the Bloomberg emerging-market bond index has a standard deviation of just 0.02 over the past 12 months, versus 0.04 for the corresponding gauge of developed-nation debt.

Emerging-market bonds have also been increasingly shrugging off volatility stemming from US Treasuries. The 120-day correlation between the yield on the Bloomberg EM local currency government bond index and a similar gauge for Treasuries fell to minus 0.06 in November, the lowest since 2014. A correlation of minus one would mean the two gauges move in exactly the opposite direction.

The decline in offshore ownership has been particularly pronounced in Indonesia. Global funds have pulled out more than $4 billion from the nation's sovereign debt following the resignation of widely-admired Finance Minister Sri Mulyani Indrawati in September.

Instead of declining, however, Indonesia bonds have rallied. This has been partially due to central bank interest-rate cuts and the transfer of around 200 trillion rupiah ($11.9 billion) from Bank Indonesia to state-owned banks, which would allow the lenders to buy more bonds.

The withdrawal of overseas investors can help reduce the sensitivity to global market forces “of a particular market by giving domestic factors greater importance,” said Philip McNicholas, an Asia sovereign strategist at Robeco in Singapore. “Moreover, it can be a sign of the growing maturity of the domestic investor base.”