Emerging market (EM) local currency bonds face a challenging landscape as the market grapples with the implications of a second Trump presidency, according to Citi's latest report. The bank highlights that 2025 will likely be a year of tactical rather than structural trades in EM fixed income, with a focus on tariffs and fiscal policy. "There is a broad consensus that this presidency will be negative-EM," Citi analysts note, emphasizing the expected broad USD strength as a key theme.
In November, EM local currency funds experienced $2.3 billion in outflows, bringing year-to-date flows to -$2.2 billion, as concerns over Trump's policies weighed on the asset class. The report also points out that non-resident holdings of EM local currency bonds have steadily decreased over the past decade, shifting the burden to local asset management and banking sectors. Despite these challenges, Citi identifies a 1y1y receiving opportunity in Hungary, as recent moves have signaled a shift towards fair value across the CEEMEA region.