At the beginning of 2026, most investors had a positive view on the global economic outlook. Growth was seen as stable, being bolstered by spending on artificial intelligence. Inflation was expected to moderate further. Central banks around the world were expected to cut interest rates or at least keep them on hold.
However, recent events in the Middle East have changed the economic outlook. The attacks involving Iran have led to severe disruption in global energy markets. The main impact of the conflict in Iran is the increase in oil prices as energy markets have become disrupted. Increased energy costs—for both oil and natural gas—will lead to higher inflation in advanced economies.
As a result of that, investors are concerned that central banks might need to raise interest rates. And in fact, in markets, higher interest rates are already priced into the markets. We don’t believe that central banks will need to raise interest rates; So we see the Fed on hold for the rest of this year. The Bank of England not having to do anything. But possibly the European Central Bank, maybe having to notch up rates a little bit.
What that means is that yields in the bond market have also increased in anticipation of higher interest rates. If you think interest rates are not going up, that is creating opportunities for bond investors.
We like short-maturity bonds, which have seen the largest increase in yields. We like credit, particularly high-yield bonds, which have been quite resilient and offer some attractive yields today: 7% in the US and 6% in the Euro. Even though we can trace the link between Iran, higher oil prices, potentially higher inflation, and what is happening in the interest rate and bond markets, we can also identify some opportunities for bond investors.
Also Read: Rising Global Bond Yields: The Test For Risk Assets
Another area of interest for fixed-income investors is emerging markets. Emerging markets are a mixed bunch of economies, and there will be winners and losers from what is happening with the oil prices. Those countries that export oil will benefit from higher revenues, while those that are big oil importers will perhaps see their economies disrupted a little bit. We are concerned that some Asian economies, which are big importers of oil, will suffer.
Taking the market as a whole, what we’ve seen is that bond yields have gone up, and that means higher potential returns going forward. So, even though we need to be selective about which emerging market economies we invest in, overall, this is an asset class that offers bond investors some interesting opportunities going forward.
