FICC Focus EM Lens: Between a Rally and a Hard Place in EM Local Rates
Jan 7, 2026
Phoenix Kalen, the global head of emerging market research at Société Générale, shares her insights into the future of EM local rates and FX. She discusses the drivers behind 2025’s expected outperformance, highlighting inflows and favorable fundamentals. Kalen explores the dynamics of dollar strength and suggests that frontier markets, especially in LATAM and Turkey, present high-carry opportunities. Additionally, she analyzes specific country risks in the context of upcoming elections and evaluates the fiscal landscape for emerging markets.
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Why EM Local Bonds Soared
- A confluence of inflows, lower U.S. rates and plunging cross-asset volatility drove EM local bond outperformance in 2025.
- These technicals plus improved EM fundamentals amplified returns because EM is a relatively small asset class.
U.S. Exceptionalism Could Strengthen The Dollar
- Phoenix expects a revival of U.S. exceptionalism to support a stronger dollar as U.S. growth and AI-driven capex attract investment.
- She forecasts DXY rising about 4% over the next several quarters given U.S. outperformance versus Europe and Asia.
EM–US Recoupling Limits FX Upside
- Since mid-2025 EM and U.S. assets have recoupled, causing stagnation in both DXY and EMFX during recent months.
- That recoupling reduces scope for further EM FX gains versus the dollar without fresh catalysts.