Middle East conflict: the first 100 days for Fixed Income markets
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Article Type
BondTalk
Topic
Opinion
Published
June 10, 2026
Read time
5 mins
Author
Colin Finlayson, CFA
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The conflict in the Middle East has now lasted 100 days. Over that period, fixed income markets have been reshaped as higher energy prices challenged the prevailing market narrative. This article examines how different parts of the fixed income market have performed during that time.

 

Market Backdrop

Before the conflict began, the market backdrop was supportive: low growth and continued disinflation were opening the door to further rate cuts in the US and UK. Strong inflows into fixed income also helped government bond yields and credit spreads fall over the first two months of the year. That changed as the conflict began in March.

 

The closure of the Strait of Hormuz pushed oil sharply higher, peaking at $126 per barrel. With memories of 2022 still fresh, bond prices fell quickly as investors reassessed inflation risks. The impact was greater in Europe and the UK where dependence on imported energy left markets more exposed than the US, a net energy exporter. Natural gas sensitivity was again a key concern for Europe.

 

Brent Crude Oil ($)



Source: Bloomberg, 11 June 2021 to 8 June 2026

 

After 40 days of fighting, a ceasefire between the US and Iran was agreed in early April. This marked the end of the most volatile period for bond markets, though not the end of the challenges. Since then, performance has diverged across different areas of fixed income.

 

Government Bonds

Government bonds were the clear losers over this 100-day period. Two dynamics dominated rates markets. First, yields rose sharply as investors priced in higher inflation. This was visible across major markets, but especially in the UK, where energy sensitivity and political uncertainty amplified the move.

 

Government Bonds - Total Returns since conflict began



Source: Bloomberg, 27 February 2026 to 5 June 2026

 

Second, the shape of the yield curve changed. Expectations for rate cuts gave way to expectations of rate hikes from the Bank of England, Federal Reserve and European Central Bank. Short-dated yields rose more than longer-dated yields, flattening the curve and reversing the steepening trend that had been in place since late 2023. Markets are now pricing around two to three hikes over the next twelve months, increasing the appeal of short-dated bonds.

 

US Yield Curve change                                                 

 

UK Yield Curve change

Source: Bloomberg

 

For rates markets, oil remains the key driver of yield levels, and that relationship has yet to weaken.

 

Corporate Bonds

Corporate bond performance can be split into pre- and post-ceasefire periods. During the first month, risk-off sentiment pushed spreads wider and returns lower as the conflict and higher energy prices weighed on confidence. After returns bottomed in late March, the ceasefire announcement triggered a recovery and spreads tightened again.

 

Credit Spread change since conflict began



Source: Bloomberg, 31 December 2025 to 2 June 2026

 

Higher yields and hopes for resolution drew buyers back into corporate bonds, with near-record new issuance absorbed easily. By the 100-day mark, spreads across investment grade, high yield and emerging markets were tighter than when the conflict began, and in some areas back towards record tights.

 

Corporate bonds again proved an attractive alternative to government bonds during an inflation shock. High yield was especially resilient, delivering a positive return of +0.73% despite an earlier drawdown of almost 2.50%, helped by strong income and lower duration.

 

Oil price vs yields and spreads – a changing relationship

One reason corporate bonds outperformed government bonds is that they broke their close relationship with oil prices, while government bonds remained highly correlated. That makes sense: sovereign yields are more directly influenced by inflation and central bank expectations, whereas corporate bonds can look further through the inflation shock to the medium-term outlook. The charts below show how that relationship shifted after the April ceasefire:

 

Government Bond yields vs Oil Price               

 

Credit spreads vs Oil Price

Source: Bloomberg, 31 December 2025 to 5 June 2026

 

Where to next…?

The conflict has lasted longer than many expected, and while optimism for a lasting resolution remains, it has yet to be secured. A crucial issue for the economic outlook is the reopening of the Strait of Hormuz and the restoration of oil flows. Without that, elevated energy prices could persist and deepen the economic impact. For bond investors, risks remain high and an active approach is still essential.

 

Fixed Income Asset Classes - Total Return since conflict began

Source: Bloomberg, 27 February 2026 to 5 June 2026

Important information

Author

Colin Finlayson, CFA
Portfolio Manager
Colin Finlayson, portfolio manager, is a member of the global rates and multi-sector portfolio management teams.
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