Emerging Market High-Yield Bonds Gain while yields on US bonds rise

Emerging market debt from India, Indonesia, Brazil, and South Africa have outperformed their peers from developed countries since President Trump’s April 2nd tariff announcement. This performance contrasts with four prior episodes since 2021 where rising US benchmark yields strengthened the dollar and hurt EM bonds. This time, the dollar’s fall has provided compensating currency returns, mitigating the duration spillover from higher US yields.

Dollar-funded investments in higher-yielding EM bonds are typically unhedged due to the prohibitive cost of protection relative to their lower-yielding counterparts, leading to amplified foreign exchange gains when the dollar weakens.

If we take the ratio of movement in emerging market bond yields in April-May period to their average yields during the four scenarios from August 2021 to January 2025 (when rising US yields hurt emerging market bonds) India’s yield movement this quarter shows the most significant deviation from its historical average, with a ratio of -0.88, compared to -0.57 for Indonesia, -0.55 for Brazil, and -0.50 for South Africa. This underscores the extent to which Indian yields have declined relative to their historical mean. In contrast, lower-yielding peers such as the Czech Republic and South Korea are more vulnerable to surges in US yields because of their tighter spreads.

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Source: HDFC Securities Prime Research