Bloomberg has reported that emerging market investors are turning to bets on decreasing global interest rates as a way to shield themselves from the uncertainty caused by President Trump's trade disputes. This approach involves focusing on the bonds denominated in local currencies of developing nations where yields are attractive and central banks have the flexibility to adjust monetary policies amidst ongoing global trade tensions. Investors can also employ receivers to speculate that interest-rate swaps will decline.

In the midst of recent market turbulence, this strategy has shown resilience. While American stocks faced steep declines, emerging-market local-government bond performance excelled, marking its best week in about a month and continuing its upward trend for the year. Notably, interest rate swaps in countries like Brazil and Chile registered their largest weekly drops since 2022.

Grant Webster, the co-head of EM sovereign debt and currencies at Ninety One, highlighted the opportunities in rates, emphasizing that weakened economic growth prospects would give emerging market central banks more leeway to adjust policies favorably.

This trend demonstrates the ability of certain emerging-market assets to remain relatively stable amid the recent market fluctuations. Developing-country stocks have gained 1.1% year-to-date, in contrast to the S&P 500's 14% decline. Additionally, the EM currency index rose by 1.7% during the same period while the dollar weakened by 3.4%.

Given the volatile market conditions, fund managers are choosing to be selective in their local currency investments, ready to cut losses on underperforming options. The trajectory of the dollar is expected to play a crucial role, especially as it dipped to multi-month lows against a basket of currencies last week due to concerns about the impact of trade tensions on US economic growth. A depreciating dollar increases the profitability of the local-debt trade for US investors, as they convert their returns into dollars.

Webster from Ninety One mentioned that despite the challenges posed by a strong dollar in the past, recent events have potentially shifted the landscape, making higher EM yields more attractive. The imposition of tariffs may have been the catalyst that was needed to boost this shift.