Emerging-market (EM) local-currency bonds have outperformed their dollar-denominated peers in 2025, even as they offer yields lower than those of US Treasuries. The strong start to the year marks their best performance since 2022, thanks to growing expectations of rate cuts in developing nations and a cooling of global inflation.

Such expectations emerged mainly from falling oil prices. In contrast, dollar bonds have lagged behind, weighed down by trade-related uncertainty and tariff threats from US President Donald Trump, as quoted on Bloomberg.

Strategists Favor Local Debt on Policy Flexibility and Dollar Weakness

Jon Harrison, Managing Director for EM Macro Strategy at GlobalData TS Lombard, emphasized a “strong preference for EM local debt” over dollar-denominated bonds. According to him, the weakening US dollar and a slowing American economy— with likelihood of sliding into recession— have created more room for EM central banks to ease monetary policy. This macro environment has made local-currency debt more appealing.

Performance Metrics Highlight Local Bond Strength

As of mid-April, Bloomberg indexes showed that EM local-currency bonds have returned 3.2% year-to-date, significantly outperforming the 0.7% return of their dollar counterparts. Interestingly, local-currency bonds are now yielding less than their traditionally safer dollar equivalents. The average yield for EM local-currency bonds has dropped to 4.03%, compared to 7.1% for dollar-denominated bonds and 4.12% for US Treasuries, at the time of writing.

Tariff Turmoil Spurs Rate-Cut Expectations in EMs

Trump’s announcement of “reciprocal tariffs” on April 2 has contributed to market volatility and heightened expectations of monetary easing in emerging markets. A softening U.S. dollar has also boosted developing-nation currencies, enhancing the performance of local-currency bonds. Bloomberg’s dollar spot index has fallen nearly 4% in April, putting it on track for its fourth successive monthly decline.

Dollar Debt Issuance Declines Sharply

The deteriorating outlook for the U.S. dollar has made some EM issuers more hesitant to sell debt in US currency. Excluding China, EM dollar bond issuance has dropped by 36% so far in April compared to the same period last year, totaling just $5.1 billion, according to Bloomberg data.

ETFs in Focus

Against this backdrop, below we highlight a few wining local currency emerging market bond exchange-traded fund (ETF) winners of the past month (as of April 17, 2025). All the following ETFs have gained over the past month while SPDR Bloomberg Emerging Markets USD Bond ETF (EMHC Quick QuoteEMHC - Free Report) has lost about 2.4% during the same period.EMHC yields 6.23% annually.

SPDR Bloomberg Emerging Markets Local Bond ETF (EBND Quick QuoteEBND - Free Report) – Up 1.5% Past Month; Yields 5.58% annually

VanEck J. P. Morgan EM Local Currency Bond ETF (EMLC Quick QuoteEMLC - Free Report) – Up 0.9%; Yields 6.25% annually

WisdomTree Emerging Markets Local Debt Fund (ELD Quick QuoteELD - Free Report) – Up 0.3%; Yields 5.53% annually

First Trust Emerging Markets Local Currency Bond ETF (FEMB Quick QuoteFEMB - Free Report) – Up 0.2%; Yields 5.88% annually

Can the Rally in EM Local Bonds Last?

The latest hints of trade de-escalation may shift the course of EM bond ETF investing. The Invesco DB US Dollar Index Bullish Fund (UUP Quick QuoteUUP - Free Report) gained 0.6% on April 22, though the fund is down 4.8% over the past month. If trade deals are reached in the coming days, the U.S. dollar could strengthen, inflation may be contained, and the economy might avoid a meaningful slowdown or recession. These factors could reignite demand for dollar-denominated EM bonds.