The Iran war sparked the biggest outflow in at least six years from South Africa’s bond market as foreign investors lost their appetite for one of the most popular emerging-market trades of recent months.

Non-residents sold a net R41.3-billion of government bonds last week, according to the latest JSE Ltd. data tracking settled trades. That’s the biggest weekly outflow on record since at least 2019, when Bloomberg started compiling the data.

It’s a sharp turnaround from the first two months of the year, when foreign investors were net buyers of R28.6-billion of the debt, according to National Treasury data. Coming on the heels of large inflows in 2025, that had left positioning ripe for a selloff, according to Deutsche Bank AG.

“We recommend remaining cautious, until more clarity on the geopolitical outlook materialises,” strategists including Christian Wietoska wrote in note. The strategists last week shortened duration exposure to South African government bonds.

South Africa’s 10-year yield plunged by more than 300 basis points to a record low in February as investors warmed to the coalition government’s economic programme, including an improving fiscal outlook and planned reduction in debt issuance. Foreign investors lifted their share of fixed-rate bond holdings to 32% at the end of February, from 30% a year earlier.

The rally took the bonds into “bubble territory,” according to Asad Bhatti, head of emerging markets at Invesco Asset Management Ltd. That’s changing as hostilities in the Middle East send oil prices skyrocketing, raising concern that the South African Reserve Bank’s 3% inflation target will be tough to achieve, at least this year. Since the outbreak of the conflict, the 10-year yield has soared 97 basis points to 9.1%, among the most in emerging markets.

In another sign of increasing nervousness, the cost of insuring the country’s debt against default over five years via credit-default swaps climbed to a five-month high.

‘Heavy Overweight’

“Given very heavy overweight positioning in SAGBs and many investors sitting on big profits, made it very easy for investors to sell out of their positions,” said Bhatti, who cut his positions in 2048 securities last week. “South Africa’s economy is also a net oil importer which also placed it into the firing line.”

Some investors see the recent declines as a buying opportunity. A credible central bank, an inflation-targeting regime as well as fiscal consolidation are among the reasons South Africa is is viewed as a “positive re-rating” emerging market, according to Arif Joshi, a senior portfolio manager at Bramshill Investments LLC.

Demand at the weekly government bond auction on Tuesday, though lower than last week, remained strong, with primary dealers placing orders for 3.5 times the amount of debt on offer.

“I’m going the other way, adding South African government bonds into this weakness,” Joshi said, adding that he expects the SARB to intervene in the market by buying bonds to shore up liquidity if the war drags on.

SARB spokesperson Thoraya Pandy said the central bank couldn’t comment as it is in a blackout period ahead of this month’s policy meeting. SARB Deputy Governor Fundi Tshazibana told Bloomberg News last week the central bank is monitoring markets and stands ready to act if major dysfunction emerges.

But investors shouldn’t count on the central bank to rescue them, said Philip Fielding, a fund manager at Fidelity International in London. “It’s not in their nature to step into the bond market and so far the flows are orderly.”

If the war rages for much longer and oil prices stay elevated, the central bank is likely to end its rate-cutting cycle. Markets have swung from pricing in two rate cuts by year-end to pricing a 25-basis-point increase, which will further drag on bonds.

“Investors are derisking in the wake of the Iran war, and South Africa is caught in that crossfire.” said Ruen Naidu, a portfolio manager at Ninety One.