Wall Street’s Favorite Emerging-Market Bet Falters on War (1)

Once a top pick among emerging-market investors, local-currency debt has become a losing trade.

After months being boosted by a weaker dollar, slowing inflation and interest-rate cuts, the bonds have delivered a loss of more than 5% since the Iran war started in late February. That’s almost double the declines of its dollar peers. Just six of the 22 main emerging-market currencies are up against the dollar this year, compared with 17 before the conflict broke out. Only Hong Kong’s hasn’t dropped since the war started.

“EM local-currency bonds have, unsurprisingly, become the primary casualty of the current risk-off ...