As US Treasury yields soar, weakening the appeal of dollar-denominated emerging market bonds, emerging market investors still prefer to hold local currency sovereign bonds. The driving force behind this strategy is attractive valuations and the potential to profit from arbitrage trading, where investors borrow in low-yield currencies and invest in high-yield assets. This preference is reflected in capital flow, position status, and relative performance. Since the end of June, the Bloomberg Emerging Markets Local Currency Bond Index has outperformed the US dollar-denominated bond index by more than 3 percentage points, and is expected to record the biggest quarterly lead since 2022. Fund managers are also taking advantage of this market fragmentation. According to a Bank of America survey of 38 global fixed-income fund managers with assets under management totaling US$444 billion, 84% of respondents overpaid emerging market local currency bonds compared to hard currency bonds, compared to only 38% in August. The investigation was conducted from September 4 to 9. However, after the Federal Reserve raised interest rates and hinted that the policy may be further tightened, this investment strategy may still be tested. If the US dollar strengthens again, it may prompt investors to withdraw from emerging market assets such as local currency bonds.

As US Treasury yields soar, weakening the appeal of dollar-denominated emerging market bonds, emerging market investors still prefer to hold local currency sovereign bonds. The driving force behind this strategy is attractive valuations and the potential to profit from arbitrage trading, where investors borrow in low-yield currencies and invest in high-yield assets. This preference is reflected in capital flow, position status, and relative performance. Since the end of June, the Bloomberg Emerging Markets Local Currency Bond Index has outperformed the US dollar-denominated bond index by more than 3 percentage points, and is expected to record the biggest quarterly lead since 2022. Fund managers are also taking advantage of this market fragmentation. According to a Bank of America survey of 38 global fixed-income fund managers with assets under management totaling US$444 billion, 84% of respondents overpaid emerging market local currency bonds compared to hard currency bonds, compared to only 38% in August. The investigation was conducted from September 4 to 9. However, after the Federal Reserve raised interest rates and hinted that the policy may be further tightened, this investment strategy may still be tested. If the US dollar strengthens again, it may prompt investors to withdraw from emerging market assets such as local currency bonds.