The surge in emerging market local-currency bonds is becoming more diverse, with investors looking to minimize risks from the US by delving into less mainstream frontier nations.

Investment firms like William Blair have acquired bonds in currencies such as Jamaican dollars, Dominican Republic peso, Pakistani rupee, and Zambian kwacha. Other companies like AXA Investment, Ninety One, Pinebridge, and BlackRock Inc. have also diversified their portfolios into less common currencies like the Kazakh tenge, Ugandan shilling, Uzbekistani soum, and Serbian dinar.

Investors are straying from traditional benchmarks and leaving currency risks unhedged to pursue higher yields in fixed income markets. They are focusing on markets that are somewhat shielded from global influences, with growth, reforms, or high-interest rates being key local drivers of investment opportunities.

The shift towards investing in lesser-known nations is a departure from the past trend of primarily purchasing sovereign dollar bonds to avoid currency risks and sticking to widely recognized names in benchmark indexes. However, this move comes with its own set of risks as these under-the-radar markets may have low liquidity and could potentially trap investors if conditions suddenly turn unfavorable due to unforeseen events. Additionally, the limited size of these markets may restrict investment opportunities.

Even though fund managers are exploring these unconventional markets for higher returns and to offset global uncertainties, they are not abandoning mainstream emerging markets entirely. Strong performances have been observed in the local-currency bond sector this year, with countries like Brazil, Mexico, and Chile leading the way in generating double-digit returns. ViewChild nations such as Egypt, offering interest rates above 20%, are attracting carry traders seeking high yields.