BNY EMEA Macro Strategist Geoff Yu says Latin American sovereign debt positioning in global portfolios is at multi-year highs. Combined holdings in Brazil, Mexico, Argentina, Chile, Colombia, and Peru are now above the peaks seen in 2023.
Total sovereign holdings in the region are just under 1.2% of global sovereign bond holdings. Latin American bonds are no longer under-owned versus historical levels.
If U.S. yields stabilise or rise, positioning may matter less for valuations. Future returns are likely to depend more on domestic fundamentals and U.S.–regional relations.
The article was created with the help of an Artificial Intelligence tool and reviewed by an editor. It was published by the FXStreet Insights Team, which curates market observations and adds analysis from internal and external contributors.
Latin American sovereign debt now looks like a crowded trade. Our holdings in the region are above the 2023 highs. This suggests the easy gains may be over because the asset class is no longer under-owned. With combined holdings just under 1.2% of total sovereign bonds, the risk of a reversal is rising.
Risks are increasing as U.S. yields firm, which can hurt the carry trade. Last week’s U.S. January inflation print was hotter than expected at 3.1%. That makes near-term Federal Reserve rate cuts less likely, possibly pushing them beyond summer. Higher U.S. yields make U.S. debt more attractive and can pressure emerging market assets.
Over the next few weeks, we should consider buying put options on broad Latin American bond ETFs to hedge our long exposure. This can be a relatively low-cost way to protect against a pullback driven by higher U.S. rates. It can also benefit from a rise in volatility, which looks more likely now that the positioning tailwind has faded.
Currency risk is now the main concern, especially after the sharp sell-off in the Mexican peso in Q4 2025. Hedging BRL and COP exposure with currency options also makes sense. A stronger dollar could erase any remaining yield advantage from the bonds.
Country selection is now more important, because domestic fundamentals should drive performance. For example, Peru’s copper exports are rising while Chile’s are lagging, which may support a relative-value trade. One approach is to use credit default swaps (CDS) to go long Peru sovereign risk while shorting Chile, aiming to capture the widening gap.
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