The investment appeal of emerging market (EM) local currency sovereign bonds looks compelling, as the macroeconomic backdrop remains relatively constructive.
The resilience of EM economies has been underpinned by credible monetary policy frameworks and relatively contained external imbalances. While energy price shocks have historically represented a headwind for EM, the current environment has produced a more differentiated outcome.
Emerging markets local currency bonds offer compelling yields
10-year local currency yield minus Bloomberg consensus inflation estimate
Latin American countries, in particular, stand out given their access to vast natural resources and distance from conflicts such as Russia-Ukraine and the Middle East. Elevated real yields in markets such as Brazil, Mexico and Paraguay continue to back the potential attractiveness of EM bonds across global fixed income.
Brazil local currency bonds, we believe, offer relatively compelling opportunities in the EM local currency landscape. From a valuation standpoint, nominal yields offered by 10-year sovereign bonds denominated in Brazilian real, which remains above 14%, remain highly attractive.
This yield cushion provides meaningful carry that may help to offset potential foreign exchange oscillation. Even when adjusting for expected inflation, Brazilian bonds currently offer real yields (nominal 10 years yield adjusted for inflation expected in 2026) in the 9% to 10% range. While it is fair to say that inflation remains above central bank target, monetary remains tight, with Selic rate still at 14%, still supporting the case for FX exposure in the country.
Brazil is well placed to benefit from the AI buildout
In addition, we see Brazil as exceptionally well positioned in the current environment. The AI revolution continues to demand elevated capital expenditures on infrastructure buildout. Such buildout will continue to require key raw materials and inputs, and Brazil has ample resources of many of these critical inputs. The rapid expansion of artificial intelligence is driving demand for electricity, power grids, data centres and industrial materials.
Brazil has significant resources in several of the areas needed to support the AI buildout. Brazil accounts for 93% of global niobium production1, a metal used to strengthen steel for transmission towers and other infrastructure. Renewable electricity represents 88%2 of its power generation, providing a large source of dispatchable and grid-connected power for AI data centres.
The country is also the world’s second-largest iron ore producer, giving it an important role in supplying steel for data centres and grid expansion. Its resource base extends further, with Brazil holding 67% of global niobium reserves3, which could support longer-term infrastructure demand.
Brazil also holds 15% of global rare-earth reserves, materials used in magnets for motors, cooling systems and power equipment, and 11% of global nickel reserves, a key input for grid-scale batteries and energy storage.
Taken together, Brazil’s combination of abundant electricity, critical minerals and industrial commodities leaves it unusually well positioned to supply some of the infrastructure and raw materials required by the global AI investment boom. The US midterm election in early November might generate some FX volatility in the short term, but we continue to be very constructive on Brazil and its local currency bonds in the long term.
Paraguay’s fiscal discipline
Paraguay is another interesting example. The country often receives limited allocation from global portfolio, but we think local currency bonds can offer a unique mix of attractive nominal and real yields, investment grade credit rating, responsible fiscal stance and well supporting national macroeconomic fundamentals.
Paraguay’s fiscal fundamentals remain supportive, with public debt at 41.3% of GDP4 in 2025, among the lowest levels in Latin America. The fiscal deficit narrowed to 2% of GDP in 2025 from 4.1% of GDP in 2023. It is expected to fall further to 1.5% in 2026, in line with the ceiling under the Fiscal Responsibility Law.
That fiscal discipline has been accompanied by an improvement in the country’s credit standing. Moody’s awarded Paraguay its first investment-grade rating in July 2024, while S&P assigned a BBB- rating with a stable outlook in December 2025. Fitch has also raised its outlook to positive, potentially broadening access to international investors.
The economic backdrop is similarly robust. Real GDP expanded by 6.6% in 2025, with growth projected at 4.3% between 2026 and 2028. Inflation is forecast at 3.3% in 2026, within the central bank’s target range. Private consumption and investment are supporting activity, alongside fixed investment equivalent to about 10% of GDP in areas including pulp, biofuels and green hydrogen. Against that backdrop, Paraguayan bonds offer a nominal yield of about 9% and a real yield of more than 5%.
Overall, the case for EM local currency bonds remains compelling. Brazil’s vast natural resources leave it well placed to benefit from the global AI infrastructure buildout. Paraguay provides a different but complementary opportunity, combining attractive yields with improving fiscal discipline, investment-grade credit ratings and robust economic growth. While currency volatility remain important risks, particularly in Brazil, the combination of supportive fundamentals, elevated real yields and favourable structural trends reinforces our constructive long-term view on selected EM local currency sovereign bonds.
Importantly, however, these considerations do not apply to the emerging markets local currency universe across the board. Various countries (especially in Asia) with lower yielding bonds are heavily represented in major EM local currency indexes. A flexible and selective approach can help to harvest the opportunities offered by the asset class, while avoiding the least attractive areas. Flexible Bond mandates are well positioned to use the degrees of freedom offered by their guidelines to allocate only to the most promising segments of the market.
Footnotes
1Source: US Geological Survey (USGS) Mineral Commodity Summaries 2026 (p. 135)
2EPE Brazilian Energy Balance 2025
3Source: US Geological Survey (USGS) Mineral Commodity Summaries 2026 (p. 135)
4Paraguay – World Bank overview
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