Emerging-market bond investors hoping for broad rallies from any US-Iran peace agreement may face disappointment, as money managers anticipate sticky inflation and fiscal concerns will keep long-term yields elevated. While reduced geopolitical risks could lower oil prices and support developing-market assets, strategists at Goldman Sachs expect gains to concentrate at the front end of yield curves rather than long-dated debt.

Global funds including Fidelity International and William Blair Investment Management are actively avoiding duration across both developed and emerging markets through year-end. George Efstathopoulos, portfolio manager at Fidelity International in Singapore, warned that markets may be underpricing further fiscal slippage risks. The caution follows climbing long-bond yields across emerging markets since the Middle East conflict began in late February, with both inflation expectations and real yields rising.

The challenge is particularly acute for EMs, where governments face pressure to shield households from fuel and food price shocks. A Citigroup index measuring inflation surprises across EMs has surged to the highest levels since October 2022. Bond yields in South Korea, Brazil, South Africa and Mexico have climbed more than 40 basis points since the war began, with Brazil's benchmark hovering above 14% amid deteriorating public finances.

Goldman Sachs strategists note that long-end rates will likely exhibit inertia due to ongoing defense spending, energy resilience and AI investment ramp-ups. The firm is instead looking for opportunities to receive front-end rates, betting on falling short-term yields from any confirmed Iran conflict resolution.