Fixed income rotation

We’re not only witnessing a rotation in equities from growth to value and from U.S. to international. There is also a rotation in fixed Income. The quilt chart below shows you the last 10 years of fixed income sub asset classes returns and you can see that EM debt both local and hard currency have provided YTD the best returns alongside the global Aggregate ex US. In other words, everything but US dollar assets. The programmed weakness of the dollar makes EM assets more attractive, and valuations are also compelling. If the second half of the year is a continuation of the first, we can see double digit returns for 2025. Notice how EMD has been in the lowest part of the chart for almost the whole decade, and once investors start rotating their portfolios out of the U.S., it’s only natural to see the opportunity It offers. As Treasuries continue to be under pressure from the U.S. budget and debt, almost everything else looks attractive in a total return basis, and for the first time in a while, the hedge costs favor international assets, which adds a kicker to the thesis.

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Source: Morgan Stanley.