BlackRock and JPMorgan Asset Management are reducing exposure to U.S. investment-grade and high-yield bonds in favor of emerging market local-currency debt, capitalizing on higher real yields as developed-market spreads tighten.
BlackRock's global fixed-income Chief Investment Officer Rick Rieder began cutting U.S. positions in February 2026, citing more attractive valuations in emerging markets and a weakening dollar. JPMorgan Asset Management's Bob Michele has taken a similar view, emphasizing that emerging market local debt offers significantly elevated real yields and expressing a preference for local currencies over hard currencies, betting on continued dollar depreciation.
U.S. credit spreads compressed to 30-year lows in February 2026, eroding the value proposition for domestic bonds. Emerging market local government bonds delivered more than 15 percent returns in 2025, driven by dollar weakness and Federal Reserve rate cuts, attracting over $60 billion in inflows during the year.
BlackRock formalized the thesis in its July 2026 mid-year outlook, moving to a small overweight in emerging market local-currency debt while shifting equities and hard-currency debt to neutral.
The trade faces significant headwinds. A September 2026 selloff in emerging market bonds coincided with markets pricing 70 percent odds of a Federal Reserve rate hike—a dynamic that would strengthen the dollar and undermine carry positions. JPMorgan CEO Jamie Dimon warned in April 2026 of a potential bond crisis tied to persistent U.S. deficits and geopolitical stress.
Higher U.S. rates typically strengthen the dollar, making dollar weakness-dependent trades less appealing. Geopolitical tensions, particularly from Iran conflict concerns, can prompt capital flight from emerging economies to the perceived safety of U.S. Treasuries. The dollar's trajectory is the single largest variable for this rotation: if the greenback strengthens, foreign exchange losses could wipe out yield advantages on emerging market local debt.
