(Bloomberg) -- Buying emerging-market debt is becoming a “consensus trade” in what could be an early warning sign for the sector, according to Konstantin Boehmer, co-head of fixed income at Toronto-based Mackenzie Investments Corp.

Total returns for a local currency government index are at 3.76% this year compared to 2.37% for a gauge compiling US Treasury debt securities. That follows outperformance of more than four percentage points for emerging-market debt over US government bonds in 2022.

“We like emerging-market local debt, but maybe one caveat is that we’re not the only ones,” Toronto-based Boehmer said in an interview. “There’s a lot of people who like emerging markets at the moment, which is always a little bit of a warning signal, like how if it’s a consensus trade, how much money can you still make on that trade? But I think you still have a little bit left.”

Brazil’s real and Mexico’s peso were among five of a group of 23 emerging-market currencies that strengthened against the dollar in 2022. So far this year, 18 currencies included in that basket are getting positive returns against the greenback, according to data compiled by Bloomberg.

Monetary policy makers in Brazil and Mexico — the two largest Latin American economies — were among nations that ran ahead of central bankers of advanced economies in tightening monetary conditions in a bid to slow inflation and contain a selloff in risk assets amid concerns of recession. Traders have been taming their long bets on the haven-asset status of the dollar, as price increases in the US are slowing down amid a largely resilient economy. 

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“EM is looking like a pretty hot trade at the moment, and that is because the dollar is weaker” said Boehmer, who added debt from countries such as Mexico and Brazil to Mackenzie’s fixed income funds. In 2022, “we saw this massive rise in the dollar and that hasn’t destroyed emerging markets. And now that we see the dollar pulling back, that is a pretty good environment for emerging markets in general.”

--With assistance from Sydney Maki.

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