Foreign Bonds Outpace U.S. Peers as Trade Tensions Drive Offshore Inflows — Evening Brief – 07.18.25 

Foreign bond markets are riding the coattails of this year’s global equity rally — with international corporate and emerging market local currency debt delivering standout performance in 2025. So far this year, the Invesco International Corporate Bond ETF (PICB) is up an impressive 12.7%, dramatically outpacing the 3.8% gain for U.S. corporates (LQD) and the 3.6% total return for the broader U.S. investment-grade benchmark (BND). 

The primary driver is clear: the U.S. dollar has weakened by nearly 8% year-to-date (per the Dollar Index ETF, UUP), creating a potent tailwind for foreign bond returns when translated back to dollars. For U.S.-based investors, this currency effect has amplified local bond market gains that were already buoyed by policy shifts and improving sentiment outside the U.S. 

Trade policy has added extra fuel. The trade war has motivated institutional allocators to revisit global diversification, shifting allocations away from dollar-denominated assets to mitigate concentrated currency and policy risk. 

Emerging market debt, long the laggard in global fixed income, has staged a remarkable comeback. The VanEck JP Morgan EM Local Currency Bond ETF (EMLC), a proxy for EM local currency sovereign debt, just closed at a four-year high. According to Damien Buchet, CIO of Principal Finisterre, “Suddenly, it makes emerging market local currency debt great again,” while Goldman Sachs’ Kevin Daly told the Financial Times that “even small inflows are having disproportionately large effects” after years of EM underweights by global bond funds. 

The underlying story here is a classic case of currency cycles and relative policy divergence driving tactical flows. With the Fed likely to cut interest rates again soon — while several developed and EM central banks have already eased or are further along in their cutting cycles — investors are finding attractive entry points in higher-yielding non-dollar bonds. 

For global bond portfolio managers, this trend underscores a broader rethink of home bias in fixed income. A weaker dollar, alongside trade frictions and fiscal risks at home, make the argument for selectively increasing ex-U.S. exposure more compelling. It also means active currency hedging strategies will matter more this year, since the dollar could see episodic reversals if the Fed pivots too soon or if geopolitical stress supports safe-haven flows. 

The strong relative returns of international corporates highlight that U.S. credit spreads — which have hovered near post-crisis tights — leave little cushion if growth weakens. By contrast, certain European and Asia-Pacific issuers offer wider spreads and improving fundamentals, supported by policy support and more constructive economic surprises. 

Meanwhile, EM local currency debt provides one of the few liquid ways to capture currency upside in a dollar downcycle, though investors must balance higher yields against political and inflation risk in select markets. 

The rally in global bonds is more than just a currency play — it’s a signal that investors are dusting off the global opportunity set in fixed income, pairing stronger international equity allocations with underowned, higher-carry debt strategies. For U.S.-based allocators, maintaining discipline on FX risk management and credit selection will be key as the dollar cycle evolves and trade frictions continue to shape global capital flows.