(Bloomberg) -- Local debt has been the star performer among emerging-market bonds this year and its advantage over hard-currency notes is likely to persist, according to JPMorgan analysts. 

The rally marks a break with the past. Bonds in local currencies have underperformed hard-currency bonds for much of the last decade partly as a reflection of the 10-year bull run of the dollar, analysts including Jonny Goulden and Saad Siddiqui wrote in a report dated Thursday.

“The strong run of emerging market local markets returns since the last quarter of last year has raised the question of whether EM local markets can have a longer run of outperformance,” they said. A likely US recession toward the end of the year could lead to more inflows, they added.

The analysts noted that so far, despite the outperformance, those inflows had failed to materialize. 

“Ahead of a likely US recession, adding a risky fixed income asset class such as EM local bonds that you have not been much involved with for a decade might be a step too far,” they said.

Latin America, which offers the highest interest-rate differentials, is “the engine of EM local markets,” JPMorgan said. 

Still, the bank took profit on its overweight in Ecuador, and remained underweight emerging sovereign credit more generally. They also said they’d gone overweight Nigeria against Kenya in their model portfolio. 

“We expect the higher rated portion of the index to sell off more significantly in a US recession, given it has not so far,” they said, referring to JPMorgan’s EMBIGD emerging-market hard-currency bond index.

Some other recommendations from analysts: 

  • Brazil: We favor receivers in the front end of the curve given positive inflation dynamics and high real rates
  • Chile: Unappealing bond valuations make us bearish Chilean duration
  • Mexico: Mexico has appealing real rates, relatively robust external and fiscal accounts; and quieter politics relative to the region
  • South Africa: Front-end rates premia is substantial, but gauging the SARB’s actions has become difficult and risks are for further hikes. Accordingly, the market could persistently price higher risk premia, keeping us sidelined. In bonds, growing fiscal risks in the context of OW positioning are a concern - we see scope for curve steepening.


(Updated with analysts’ other recommendations for EM countries.)

©2023 Bloomberg L.P.