Head of Global Macro and Portfolio Manager
• Quarterly outlook
Fixed income outlook: Flashback
In our latest fixed income outlook, we reflect on how the near closure of the Strait of Hormuz and the surge in oil prices are bringing back memories of the inflation shock two years ago.
Authors
Strategist
Strategist
Summary
- Oil supply disruption undermines the benign macro environment
- The latest developments bring back memories from 2022
- Recent repricing offers an opportunity to gradually rebuild positions
In our last outlook, They want it all, we argued that markets were priced for perfection, leaning on a broadly supportive macro backdrop to keep equity and credit valuations elevated. Any disappointment in these underlying assumptions risked shifting the market tone.
The near closure of the Strait of Hormuz has now introduced a significant energy‑related disruption that threatens to undermine this previously benign environment. Recent developments have revived several dynamics last seen in 2022: energy prices moving sharply higher, bond yields rising quickly, and the stock-bond correlation at risk of turning positive just as inflation concerns re-emerge. Equity markets have, so far, digested these developments relatively calmly, suggesting investors still view the broader macro implications as manageable.
Recent developments have revived several dynamics last seen in 2022
Fixed income markets, particularly in Europe, are reacting far more forcefully. Front-end yields have risen sharply, spreads have widened and renewed concerns over energy dependency have added to volatility. Earlier in the year, sovereign bonds briefly regained a safe-haven role, but this quickly faded, especially in Europe, where short-dated yields moved aggressively higher and markets recalibrated towards an ECB rate hike for 2026.
Several central banks that had been signaling cuts, including the Bank of England, may now have to delay those plans. The US rates complex has remained relatively stable, supported by the view that the Fed still has the flexibility to cut if conditions soften, which is also our base case.
Market positioning has shifted toward slower growth expectations, with European country spreads widening. Credit markets have also seen some pressure, but all in all the moves have been quite benign so far.
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