After 15% Gain, Traders See Fed Cuts Powering EM Bond Rally

Core Viewpoint - The Federal Reserve's shift towards cutting interest rates is expected to boost emerging-market bond rallies, particularly benefiting countries like Brazil, South Africa, and Hungary [1][3]. Group 1: Market Performance - A benchmark for domestic debt from developing-world governments has delivered a 15% return in dollar terms this year, marking the best performance since at least 2017 [2]. - The recent gains were driven by uncertainties stemming from President Trump's trade war and rapid policy changes, prompting investors to seek opportunities outside the U.S. [2]. Group 2: Investment Strategies - Fund managers are increasingly favoring local currency-denominated debt, which could see amplified returns if the dollar continues to weaken [4]. - Companies like DoubleLine Capital and JPMorgan Asset Management are focusing on emerging-market currencies and local bonds, while Bank of America Corp. highlights the attractiveness of EM carry trades [4]. Group 3: Investor Sentiment - There is a noticeable increase in interest for non-dollar allocations, with a resurgence in benchmark-aware strategies related to emerging markets [5]. - The Fed's easing policies are anticipated to further depress the dollar, enhancing the returns on bonds backed by appreciating currencies [6]. Group 4: Increased Exposure - T. Rowe Price Group Inc. has raised its exposure to bonds in emerging and frontier markets, betting on their higher yields to attract global funds [7]. - The firm suggests that capital inflows into emerging markets could create a virtuous cycle, improving fundamentals and attracting even more capital [8].