Bonds are prized for offering stability in an asset‑allocation strategy, providing an offset to the higher risk in stocks, particularly during periods of market stress. But since the Iran war began, fixed‑income securities have had a rough ride as markets struggle to assess whether the conflict’s main threat is higher , slower growth (if not recession), or some mix of both.
A broad review of the US bond market, using a set of ETF proxies, shows that some corners of fixed income are posting gains since the conflict began on Feb. 28. But the winners aren’t the usual suspects that you would expect to shine an energy shock and a Middle East war.
The leading performer so far since the fighting started—through yesterday’s close (Apr. 13)—is bank loans. The Invesco Senior Loan ETF (NYSE:) is up more than 2%, far ahead of the rest of the fixed‑income field. Before the war, few investors thinking about safe havens for a new Middle East conflict would have anticipated that BKLN’s portfolio would become a go‑to port in the storm, but here we are.
BKLN primarily holds floating‑rate senior secured loans—also known as leveraged loans—issued by US corporations. These loans sit high in the capital structure and typically carry below‑investment‑grade credit ratings. The fund’s relatively strong performance suggests that a preference for higher yield, by way of higher risk, has been a motivating factor for investors during the current turmoil.
A conventional junk‑bond ETF is in second place during the war‑driven rally in select slices of the bond market: the SPDR Bloomberg Short Term High Yield Bond ETF (NYSE:) is up 0.6%. Just behind it is the iShares 0-5 Year TIPS Bond ETF (NYSE:), edging up 0.5%.
Meanwhile, medium‑ and longer‑term Treasuries are underwater so far during the war period. The biggest loser is long‑term government bonds (), which have tumbled 3.8%.
One interpretation: inflation worries are dominating risk perceptions for Treasuries. By contrast, the view that government bonds would benefit from heightened anxiety about slower economic activity or recession seems to be in remission at the moment.
But this explanation isn’t fully satisfying. The Treasury market’s implied inflation forecast has remained relatively stable since the war’s start. The so‑called breakeven rate—the yield spread between nominal and inflation‑indexed Treasuries—hasn’t changed much in recent weeks, and is still trading in the mid‑2% range.
If inflation isn’t weighing on Treasuries, what is? Fiscal risk may be a factor. As I’ve been discussing at TMC Research recently, the government’s budget deficit continues to flash warning signs. The high price tag for the war isn’t helping.
Is the bond market looking for new safe havens these days? Hard to know for sure, but the pivot into high‑risk bond securities doesn’t fit neatly into the standard playbook for periods when geopolitical risk spikes.