Market Pulse: Global Fixed Income Update

The escalation of the Iran conflict and disruption to the Strait of Hormuz have triggered a material global oil supply shock, pushing energy prices sharply higher and reintroducing inflation risks across regions. This has shifted the macro narrative from disinflation toward a more stagflationary backdrop, where central banks face a trade-off between slowing growth and renewed price pressures. The key implication is that rates volatility is likely to remain elevated, with policy paths increasingly dependent on the duration and severity of the energy shock.

Analysis and Conviction Updates

• Global Economics
  • The supply shock to oil prices stemming from strife in the Middle East has increased inflation risks and reduced confidence in the disinflation path, while leaving growth more uncertain across the globe. In the U.S., the impact of higher oil prices is likely to have only a modest direct impact on growth given its greater independence as an oil-producing nation. Europe is more exposed with energy and gas prices likely to push inflation higher while actively weighing on growth. China remains relatively insulated given policy flexibility and weaker demand at the moment.
• Global Interest Rates and Currency Strategy (GIRCS)
  • The GIRCS committee shifted its view on U.S. rates to a more neutral stance, reflecting ongoing strength in growth indicators and a shift in market pricing toward fewer expected cuts from the Federal Reserve this year. The bar for hikes remains high, in our view, given the supply-driven nature of the shock to oil prices. However, further escalation in Iran remains a key risk and the outcome of the war will be a critical influence on the path of rates over the coming months.
• Sector Strategy
  • Our Sector Strategy meeting featured discussions of rising liquidity risks in private credit, a downgrade for valuations in asset-backed securities to a more neutral place after recent outperformance, as well as a downgrade to taxable municipal bonds to unfavorable given poor relative value. At a higher level, the outlook for credit risk looks more mixed in the near term as spread valuations remain full while risk-taking sentiment has deteriorated.

Bottom Line: The conflict in Iran has reignited inflationary concerns, bringing with it rising volatility across fixed income markets. The duration of the conflict from here remains the key question. Though no one can know how events will unfold, our experience and expertise will help guide our actions in investing for our clients through uncertainty.