Bond investors should anticipate another interest rate hike if the conflict between the United States and Iran escalates further. According to Mark Dowding, Chief Investment Officer at RBC BlueBay, the risk of a new military escalation in the coming month has risen to around 30%. A further rise in energy prices could fuel inflation again and force central banks to raise interest rates further.

"Peace talks between the U.S. and Iran have pretty much stalled. So far, the U.S. midterm elections have been a key brake on further escalation because Trump wanted to prevent another spike in energy prices. After the elections, that brake largely disappears," said Dowding.

According to Dowding, the impact on the bond markets could be significant. "A new escalation could push oil and gas prices even higher on top of the inflation shock that is already affecting the global economy. This increases the risk that central banks will have to raise interest rates further." 

For RBC BlueBay, this is reason enough to adjust their positioning in bonds. "We think this is a good time to reduce our holdings in long-term government bonds from developed countries. These bonds are particularly sensitive to further interest rate increases," Dowding said.

Read the latest updates from BlueBay CIO, Fixed Income Mark Dowding