Over the past decade, Western Asset has built deep, lasting partnerships with official institutions throughout Latin America. Our regular engagement in the region has provided us with a clear perspective on how reserve managers have adapted with agility and resilience to a rapidly evolving market landscape. This has led to a decisive shift toward more diversified investment strategies that seek to thoughtfully balance liquidity, safety and return.
In the early 2010s, Latin American reserve portfolios were highly conservative: over 90% of assets were held in US dollars, concentrated in government bonds, gold and cash. During this period, foreign exchange (FX) reserve growth as a share of GDP was largely stagnant. Two key forces shaped these dynamics. First, persistent economic and political challenges in countries like Brazil, Mexico and Peru have led to frequent FX interventions, exerting pressure on both economic growth and reserve levels. Second, the Federal Reserve’s aggressive monetary tightening, which began in March 2022, has resulted in a prolonged period of US dollar strength, prompting several Latin American central banks to draw down their reserves in an effort to manage currency depreciation.
For reserve managers, protecting reserve levels is paramount. FX reserves are critical for supporting exchange rate stability, providing liquidity in times of crisis, meeting external debt obligations and safeguarding against national emergencies. Recent drawdowns have underscored two core priorities. The first is maintaining ample reserves in safe, liquid assets—primarily US government bills and bonds—to ensure readiness for periods of stress.
The second priority is generating higher returns. Years of low or negative rates forced reserve managers to reconsider their approach and take on more risk to rebuild reserves. As their expertise grew, we observed a clear shift toward diversification into a broader range of asset classes, including corporate bonds, agency mortgage-backed securities (MBS) and, in some cases, equities, all within a more active portfolio management framework.
Interest in corporate debt may seem counterintuitive given the ongoing volatility in US Treasuries, trade policy uncertainty and credit risk concerns. Yet, corporate credit has become a focal point for central banks. The fundamentals are compelling: corporate balance sheets are stronger, global financial conditions remain supportive and yields are above decade-long averages. Technical factors also favor the market, with robust demand from yield-seeking investors. Importantly, the US investment-grade corporate bond market—now over $7 trillion—is deep and liquid, making it attractive for sovereign investors seeking moderate credit risk and enhanced returns.
Today, Latin American reserve managers are also exploring green and social bonds issued by multilateral organizations, reflecting a broader shift toward integrating sustainability into reserve management. According to a recent HSBC survey of 125 central banks, 36% now include sustainability as a core reserve management objective. This evolution is driven by both the risks of climate change and the desire to influence climate outcomes through investment. Green bonds, in particular, have become a preferred tool for expressing sustainability goals, and some institutions are now managing corporate bond portfolios against climate-aware benchmarks to achieve decarbonization targets.
Sovereign investors in Latin America continue to manage reserves through a blend of liquidity portfolios—often utilizing commingled vehicles such as money market funds—and longer-term, customized fixed-income accounts. The outsourcing of reserve assets is frequently entrusted to external managers like Western Asset. Liquidity investments are currently benefiting from yield levels not seen in over a decade, driving steady inflows to our money market fund complex. Broad-market mandates typically include US Treasuries or global sovereign bonds (hedged to the US dollar) with short to intermediate durations.
Looking ahead, we expect Latin American reserve managers to continue diversifying across asset classes to strengthen their reserves. This shift is driven by higher global fixed-income yields and the need to address de-dollarization risk. However, most agree that this transition will be gradual, with US assets and the dollar likely to retain their safe-haven status for the foreseeable future. According to the IMF, the US dollar remains the world’s dominant reserve currency, but its share of global allocated reserves has declined from nearly 60% a decade ago to approximately 54% by the end of 2024. This trend toward diversification is global, and Latin America is following suit. Even so, expanding into new asset classes—such as corporate credit, MBS and green bonds—introduces operational complexity and requires significant investment in both people and systems, so the process will take time.
That’s where Western Asset comes in. Our sovereign clients rely on us not only for fixed-income expertise, but also for thought leadership, technology transfer and comprehensive training. We support them in designing and implementing custom benchmarks, building model portfolios and conducting scenario stress tests to inform asset allocation decisions. Beyond these core services, we’re increasingly engaged in discussions about integrating climate stress testing into reserve management strategies. Our collaboration with regional clients also extends to topics such as digital currencies, fintech regulation and cybersecurity frameworks, with knowledge sharing accelerating across multiple channels. More recently, we’ve seen growing interest in leveraging artificial intelligence to optimize operational efficiency—a trend we believe will drive staff productivity and fuel the next wave of innovation in market research, risk management and portfolio analysis.
In Closing
Latin American reserve managers are increasingly diversifying beyond traditional US dollar assets by exploring opportunities in corporate credit and sustainable investments. This intentional shift is designed to enhance returns and strengthen sovereign resilience amid global market volatility. As the financial landscape becomes more complex, effective reserve management demands greater expertise and adaptability. With tailored solutions and deep market insight, Western Asset is committed to supporting clients as we work together to build a more robust and forward-looking reserve management framework for Latin America.