Emerging market bonds are facing heightened pressure due to increased currency volatility under the new US administration, which has been fueled by headline risks and tariff uncertainties. This volatility has a more pronounced impact on EM bonds compared to equities, as evidenced by the substantial inverse relationship between currency swings and bond performance since mid-December. The MSCI EM ex China equity index has gained nearly 2% since the start of the year, while EM bonds have only managed a 1% gain, highlighting the greater susceptibility of fixed-income markets to FX fluctuations.
The potential for new tariffs, particularly a proposed 10% levy, adds to the uncertainty, although it is less severe than the 60% initially floated during the campaign. This softer stance offers temporary relief to emerging markets, but the risk remains that these measures could still be implemented, leading to further currency volatility. Stable US growth is essential for supporting EM assets, especially given China's uneven recovery. However, higher US yields and the threat of inflation could dampen demand for EM bonds, increasing the opportunity cost of holding them.
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), which focuses on providing exposure to local currency bonds from emerging markets, is currently trading at $23.29 as of 19:41 on January 23, down from its last close of $23.59. The ETF's performance reflects the broader challenges facing EM bonds amid ongoing currency volatility and tariff uncertainties.