BNY’s Head of Markets Macro Strategy Bob Savage reports a synchronized selloff in EM sovereign debt as risk aversion rises with the Iran conflict. EM fixed income is seeing widespread net selling, while U.S. Treasuries, Bunds and other high-quality G10 assets benefit. The move reverses earlier diversification into EM duration and marks the strongest year-to-date EM selling across regions on a smoothed basis.

Conflict drives rotation into core bonds

"We have been documenting some of the assets most exposed to the current conflict, but in light of elevated risk aversion – notwithstanding some suggestions of a gradual cessation of hostilities – there are signs of a broadening in scope for asset liquidation."

"Our latest data refresh shows that, barring a handful of names in Latin America, almost every single emerging market fixed income market is now being net sold."

"U.S. Treasurys are clearly benefiting, with some residual flows into the likes of Bunds and other higher-quality G10 assets."

"On current evidence, however, this could prove one of the most challenging periods for EM fixed income, as the nature of the supply shock means there are very few places for shelter."

"For all three EM regions, selling last week was the strongest YTD on a weekly smoothed basis, and there is not a clear link between prior flow trends and what materialized last week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)