The world’s best performing fixed-income index since 1992 is now stuck in a rut. And as stagflation concerns continue to mount in the emerging markets, returns are likely to turn negative for the first time since 1998.

The J.P. Morgan Emerging Markets Bond Index has outpaced the returns generated by all other debt markets over the last 15 years, including strips and junk bonds. Emerging market debt has also outpaced the S&P 500 Index since 1993 and many other industrialized economy stock markets.

Marked by a boom in emerging markets growth since 1998, including soaring foreign exchange reserves, a host of credit upgrades and shrinking trade deficits now well into surplus this decade, emerging market bonds have generated double-digit gains. Earlier this spring, Brazil, one of the largest constituents of the emerging markets bond index, was boosted to investment-grade status by the credit rating agencies. Brazilian debt maturing in 2015 now yields just 1.16% more than comparable Treasury bonds – an incredibly low yield premium compared to just five years ago.

But with growing inflation concerns, especially in Asia, investors are redeeming mutual funds dedicated to this sector.

According to Emerging Portfolio Fund Research, the appetite for global bond funds continues to fall off a cliff with year-to-date outflows now exceeding $15 billion dollars. For the week ending June 20, emerging market bond funds suffered from growing jitters about rising inflation in Turkey, Russia, China and Argentina. In Asia, consumer prices are now in excess of 7.5% -- their highest rate in 9 ½ years. Also, many emerging market economies are now overheating as central banks combat rising inflation with rate hikes. Rising interest rates, combined with growing inflation, depresses bond prices.

Over the last several years, amid a massive bull market for raw materials, emerging market countries have benefited from shrinking credit spreads, or interest rate differentials between emerging market bonds and risk-free Treasury bonds. The largest emerging markets, like Russia and Brazil, benefit enormously from rising commodities prices. Others, including China and India, have also been the recipients of an export boom driven by low wages.

Despite the increasing redemptions in 2008 from individual investors, credit spreads remain historically low with the benchmark J.P. Morgan Emerging Markets Bond Index yielding just 2.88% more than ten-year Treasury bonds. Over the last 12 months, emerging market debt has gained 5.9% compared to 12.6% for ten-year T-bonds. But this year, the asset class is down 1.6% as inflation and rising rates knock prices lower.

With the exception of high-grade corporate debt in the United States and in Europe, the majority of fixed-income markets should be avoided in a growing environment of toxic inflation in food and energy prices. Many emerging market central banks will be forced to raise rates even higher this year and that will be bad news for stocks and bonds.

For now at least, it looks like the big post-2002 bull market for emerging market assets is finally over. It won’t resume until governments lick inflation.