The outlook for emerging market bonds denominated in local currencies is deteriorating as investors abandon hopes of rate cuts, brace for a potential trade war, and watch the US dollar soar to new heights. A Bloomberg index tracking local debt in developing countries has dropped 3.5% since early October, slashing the year-to-date gain to under 2%. The sell-off has only accelerated since Donald Trump’s electoral victory, with his “America First” policies fuelling fears of economic disruption, driving the dollar higher, and pushing US Treasury yields to unsettling levels.

The high probability of a renewed trade war will weaken EM currencies and delay the pace of rate cuts. Add rising US bond yields and the anticipated surge in US deficits—it’s a toxic combination for emerging market bonds.

Uncertainty surrounding Trump’s economic agenda has already spooked traders into slashing their bets on rate cuts for emerging markets. A Bloomberg index tracking one-year swap yields across 18 developing economies has jumped more than 16 basis points this quarter, marking its steepest rise in over a year.

The surging dollar, bolstered by Trump’s win, is compounding the problem. The stronger greenback has intensified speculation that central banks in emerging economies will be forced to delay planned rate cuts to protect their weakening currencies.

Even more dramatically, Brazil—grappling with inflation fears—accelerated its tightening cycle with a 50-basis-point rate hike earlier this month. For a country already battling economic fragility, this is hardly the news its bondholders wanted to hear.

Emerging market bonds are facing additional pressure as US Treasury yields climb, threatening to lure capital away from developing economies. The yield on 10-year US Treasuries has surged to 4.50%—a leap from 3.60% in mid-September—with some analysts predicting it could surpass 5% in the coming months.

The pain threshold for emerging market bonds is around 4.40% on 10-year Treasuries, precisely where we are now. If yields climb further, the outlook for emerging market debt could darken considerably.

In a stark reversal, emerging market sovereign bonds now offer yields around 10 basis points below those of US Treasuries—an extraordinary inversion for an asset class that has historically carried a risk premium of around 230 basis points. It’s little wonder that analysts and strategists are urging caution.

Amidst this turmoil, one cannot ignore the glaring double standard. While the West preaches the virtues of free trade and open markets, Trump’s policies reflect a starkly different reality: an unashamed prioritisation of domestic interests, even at the cost of global economic stability. For years, developing nations have been told to liberalise their economies, only to be now punished by the systems they were encouraged to embrace. Emerging markets are once again left to bear the brunt of Western contradictions as the dollar’s rise and tariff threats upend their growth trajectories.