EM investors turn pickier on inflation-linked debt after big run

Persistent inflation worries and currency swings are pushing emerging-market investors to adjust bets in an $886 billion inflation-linked bond market that has delivered outsize returns for more than a year, livemint.com reports. An index tracking such local-currency government debt has handed investors an 11.3% return in 2026 through Thursday, following its best year in over a decade. This compares with a 1.5% gain for a broader index of local debt and a 0.1% loss for the benchmark Bloomberg Global Aggregate Bond Index.

After strong returns in Brazil and Mexico, the two largest markets, traders are turning to so-called linkers in Chile, Poland and Argentina. Benjamin Souza of BlackRock said investors need to be selective because not all inflation-linked bonds offer the same risk-reward profile. Thierry Larose of Vontobel is favoring linkers in Argentina but has switched away from them in Brazil, betting implied inflation expectations are turning excessive. Kieran Curtis of Aberdeen said linkers are expensive in most countries except Poland.

The majority of these notes come from Latin America, where El Nino risks could push food and energy costs higher. Brazil and Mexico account for more than half of all index-eligible EM inflation-linked debt, a pile above $800 billion. Jeff Grills of Aegon Asset Management said he prefers fixed-coupon bonds in Brazil now that long rates are mid-double digits, but favours linkers in Chile and Colombia. The Turkish central bank on Thursday revised its year-end inflation projection to 28%, up from 26%, acknowledging a 'partial failure' to meet CPI targets.