BNY data shows a synchronised sell-off in emerging market (EM) sovereign debt as risk aversion rises amid the Iran conflict. EM fixed income has shifted to widespread net selling, while demand has moved towards US Treasuries, Bunds and other higher-quality G10 assets. The move reverses earlier diversification into EM duration and is described as the strongest year-to-date EM selling across regions on a smoothed basis. The scope of liquidation has broadened, despite references to a possible gradual easing of hostilities.

Emerging Market Debt Flows Shift

BNY’s latest refresh indicates that, apart from a handful of Latin American markets, almost all EM fixed income markets are now being net sold. Treasuries are reported as the main beneficiary, with additional inflows into Bunds and other core G10 holdings. Across all three EM regions, selling last week was the strongest year-to-date on a weekly smoothed basis. The update also states there was no clear link between earlier flow trends and the pattern seen last week. We are seeing the after-effects of the broad asset liquidation that occurred during the Iran conflict escalation late last year. The synchronized selloff in emerging market fixed income was one of the most severe since the Taper Tantrum of 2013, with bond funds like the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) seeing outflows exceeding $5 billion in a single quarter. This move into safe-haven U.S. Treasuries pushed the 10-year yield briefly below 3.8% in January, a level not seen since mid-2025. As of today, March 11, 2026, with hostilities having eased, the primary focus should be on volatility. The VIX index, which spiked from a calm 14 to over 28 during the crisis, has since retreated to the high teens, creating opportunities to sell overpriced options. We should consider strategies like selling puts on stable indices such as the S&P 500, as implied volatility remains elevated compared to the actual expected market movement. The indiscriminate nature of the emerging market selloff has created dislocations. Credit default swap spreads for countries with minimal direct exposure to the conflict, like Brazil and Mexico, widened in sympathy, with the CDX Emerging Markets Index blowing out by over 75 basis points. Now is the time to look at buying call options on specific country ETFs that were oversold but possess strong domestic fundamentals, betting on a quicker recovery than the market is pricing in.

Positioning After The Risk Shock

The supply shock element of the conflict drove WTI crude oil futures from $82 to nearly $100 per barrel in the fourth quarter of 2025 before settling back to the high $80s where they trade today. With geopolitical risk premiums now contracting, using put option spreads on crude oil could offer a defined-risk way to position for a further normalization in energy prices. This is based on the view that the supply disruption fears were overblown relative to the actual impact on global output. The rotation back into core bonds has likely run its course for now, with U.S. and German yields stabilizing. We should now watch for signs of capital returning to higher-yielding assets as the memory of the conflict fades. A key derivative play would be to monitor futures on EM currencies like the Mexican Peso or Brazilian Real against the U.S. dollar for signs of renewed strength. Create your live VT Markets account and start trading now.

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