We cover 9 reasons why a measured allocation to this asset class can offer great diversification to investor portfolios, and what to keep in mind when assessing opportunities and managing the associated risks.

1. Attractive yields
Emerging market sovereigns pay a meaningful premium over developed market bonds. That yield pick-up rewards risk and offers a source of steady carry that compounds over time. Local currency bonds often add extra carry when real policy rates remain positive.

2. Currency appreciation potential
In local bond markets, exchange rates can be a second source of profit. If a currency is undervalued compared to its purchasing power, or if the country’s trade and financial flows are improving, the currency may rise in value and boost overall returns. Factors like better trade terms, credible inflation control, and central banks with strong reserves make this more likely and reduce volatility, attracting foreign investors. Investors can choose to invest with full currency exposure or hedge part of it to limit losses.

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