Emerging market local currency bonds are facing a tough start to 2025, as rising developed market (DM) yields and uncertainties surrounding U.S. economic policy create headwinds, according to Citi's latest report. The report highlights that Asian markets have shown resilience due to attractive real rates and domestic support, but warns of medium-term vulnerabilities in EMFX due to U.S. policy impacts on capital flows. "We remain cautious on EMFX in the medium-term given the potential impact of US policy on capital flows and the declining real yield cushion," Citi analysts note. The report also points out that EM central banks are nearing the end of their easing cycles, which could affect flows into fixed income currencies like ZAR, IDR, and MXN. Additionally, fiscal concerns in countries like Brazil, Hungary, South Korea, and Romania are expected to draw investor scrutiny. As the USD rally continues, Citi believes that reduced EM carry makes EMFX vulnerable in the near term.