Key Highlights

• High-yielder holdings remain elevated as flows diverge
• EM APAC equity flows strengthening but imbalanced
• U.S. Treasury assets not facing rotation risk

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Overheld high-yielders starting to split flows

EXHIBIT #1: EMEA AND LATAM HIGH-YIELDING / COMMODITY CURRENCIES – HOLDINGS VS. FLOWS

_{Source: BNY iFlow}

Our take

FX carry trades have failed to sustain their strong start to the year. However, that should not detract from the fact that the strategy remains heavily owned. The iFlow Carry holdings indicator remains at the highest levels in over 18 months, but there is now a clear split taking place in the underlying flow.

Exhibit #1 highlights the carry- or commodity-driven currencies in EMEA and LatAm. Unsurprisingly, with the exception of Chile, where holdings are close to flat, all these currencies are comfortably overheld. However, some of the most favored names, such as ZAR, HUF and BRL, have underperformed year-to-date. The macro conditions in these economies are not uniform. Though valuations across emerging markets (EM) are now quite rich, hedging FX exposures is understandable, even with a favorable real rate outlook.

Meanwhile, COP, PEN and CLP are leading LatAm flows, while TRY and PLN are seeing improvements in longs despite ongoing fiscal dominance concerns.

Forward look

Adding to EM allocations is a consensus trade for the year, but we believe equities yield the strongest risk reward. For high-carry names, apart from commodity interest, the financial account will likely remain dependent on good inflows into fixed income, which requires a solid real rate anchor. FX valuations are generally supportive, as they correspond to currency strength that helps limit pass-through inflation. However, the prospect of rate cuts, while the Fed is not accelerating its own easing, creates a challenging environment for more sustained FX gains. Consequently, given the current level of elevated FX holdings among carry names, the balance of risks remains skewed toward increased hedging flows.

Equities: EM APAC (especially China) increasingly concentrated in tech

EXHIBIT #2: EM APAC EQUITY HOLDINGS BY SECTOR (GICS LEVEL 1) – 2025 TO PRESENT

_{Source: BNY iFlow, Bloomberg}

Our take

APAC equity markets, led by China, have started the year strong and may be benefiting from modest diversification away from the U.S. We highlighted last year that while U.S. equity holdings now account for close to two-thirds of our custody equity portfolios, the corresponding figure for China remains below 1%. Even adjusting for market access constraints and geopolitical risk, the figure remains disproportionately small. From an asset allocation perspective, increased exposure to China and EM APAC does not need to come at the expense of U.S. holdings. However, absolute improvement in regional equity performance and flows masks a growing imbalance driven by tech concentration.

The strategic investment case for IT and AI-related names is clear, and holdings have returned to the highs first seen in October 2025. In contrast, holdings in consumer discretionary and consumer staples have declined from already weak levels, and now sit below the rolling 12-month average (Exhibit #2). In some respects, asset allocation in EM APAC, notably Chinese equities, is starting to mirroring that of the U.S., where strong tech performance has not translated into stronger household demand.

Forward look

Last week, the State Council announced plans for “a coordinated fiscal-financial policy package to spur domestic demand.” President Xi Jinping also reinforced guidance on boosting consumption. The messaging suggests more forceful fiscal support at the March National People’s Congress. However, equity allocations, at least from cross-border investors, do not appear to reflect expectations for fiscal stimulus large enough to drive any comprehensive re-rating.

Fundamentally, investors may also question whether household consumption will ever be accepted as a primary growth driver given the country’s strategic needs. Outside of China, stagnant real income growth is also a pertinent theme for emerging economies in APAC. Specific policy support is needed. However, we believe central banks may passively allow currency strength to support demand through the import channel, while residual discretionary spending is channeled into the domestic economy. If successful, such efforts could make intra-region sectoral rotation a more attractive equity strategy than broader country- or region-level reallocation (i.e., diversification away from the U.S.).

Fixed Income: “Sell U.S.” doesn’t mean Europe benefits

EXHIBIT #3: SHARE OF GLOBAL PORTFOLIOS – U.S. VS. EUROZONE SOVEREIGN DEBT

_{Source: BNY iFlow, Bloomberg}

Our take

In the immediate aftermath of the “Liberation Day” tariffs, markets began to question the primacy of U.S. assets – from the dollar to U.S. Treasurys. The dollar adjusted significantly in 2025 to reflect some degree of risk premia, and iFlow data showed incremental gains in hedging interest by cross-border investors.

Nonetheless, rotation out of U.S. assets has remained more narrative than reality. Our latest iFlow parameters update enables us to track country-level fixed income holdings as a share of total global assets under custody and administration. As of early 2026, U.S. sovereign bonds represent 72.6% of global holdings, well above the U.S. equity share of 63.9%. 

Forward look

Observing the positioning trends in global fixed income over the past year, we note that the current U.S. share is also slightly stronger than the corresponding level at the beginning of 2025. In other words, global sovereign bond investors are more overweight Treasurys now than they were before Inauguration Day. Although there was a notable drop in the quarter following “Liberation Day,” the U.S. lost just 2pp in sovereign bond share.

Europe was well-positioned to benefit, with high bond market liquidity and steeper yield curves. Yet its net gain was less than 1pp, and performance has since disappointed. Although wider European debt flows have had a strong start to the year, for now there isn’t much scope for European fixed income to outperform the U.S. in nominal and real yield terms. Consequently, we expect U.S. Treasury holdings to remain resilient.

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