Alex Veroude, Head of Fixed Income, looks at how the breadth of fixed income markets can help balance risks and opportunities and explains why he believes a sense of perspective can help cut through market noise.
A war between Israel/US and Iran was on few people’s radar heading into 2026. Our message of seeking resilience in our annual outlook, therefore, turned out to be sage. Challenges to fixed income markets in the first half of 2026 predominantly reflected a shift in interest rate expectations as markets grew concerned that higher energy prices from disrupted oil and gas flows from the Middle East could ultimately feed through into broader inflation.
Rates dominate credit
The global economy defied doom-mongers, but geopolitical tensions found an outlet in rates volatility. Sovereign bond yields rose, reflecting the monetary policy realignment as prospects for rate cuts broadly gave way to pauses and, in some cases, hikes. Fresh fiscal concerns also lifted yields, with longer-dated bond yields breaching the highs of recent years in most developed markets.
With the outlook for US central bank rates policy still in the balance, and leaning hawkish elsewhere, we remain cautious on duration risk. Inflation concerns have risen, not just because of the fallout from the Middle East conflict but also because economies have been more resilient than expected. Meanwhile, artificial intelligence (AI)-related spending is proving inflationary initially (e.g., higher chip/memory costs) ahead of anticipated productivity gains.
