As panic over inflation gives way to fears about a global recession, emerging-market investors are making a pivot too. They're now favoring countries where interest rates are still low.

Investors have snapped up local bonds from Indonesia and Thailand, where benchmark rates had hovered around the record lows to which they were cut during the depths of the pandemic. The same happened with debt from India, where the central bank has delivered just one hike.

That's a reversal from the first months of the year, when low-yielding bonds were dumped in favor of debt from nations such as Brazil and Chile, which led the world's tightening cycle. But over the past weeks—with fears of recession superseding concerns about prices, even as inflation continues to spur pain from Sri Lanka to Argentina—having high interest rates is no longer seen as the benefit it once was. It could even be viewed as a drawback when low inflation and growth are at a premium.