Risk sentiment improves
Markets saw a clear improvement in risk appetite last week following a de-escalation in Middle East tensions. Earlier concerns had been driven by strong rhetoric from the US administration against Iran and its civil infrastructure.
These fears eased meaningfully after a ceasefire agreement was reached, reportedly with diplomatic support from Pakistan. Notably, credit markets had already begun to signal a more constructive environment ahead of the announcement.
Corporate bond spreads had been tightening since the previous week, pointing to improving investor confidence, an early signal that proved accurate once geopolitical risks receded.
Historically, similar episodes of heightened rhetoric followed by de-escalation have tended to occur when US tenyear Treasury yields move above the 4.3% level. This level appears to represent a political and fiscal sensitivity threshold, given its impact on government refinancing costs. In such phases, markets often anticipate a moderation in policy posture, which again materialised.
The announcement of a twoweek ceasefire had an immediate and broad impact on global markets. Equity markets opened with strong gains on Wednesday, while bond markets rallied. Yields declined across the curve, with a notable steepening as shorterdated yields fell more sharply than longer maturities. This move reflects reduced expectations for future central bank tightening and was broadly observable across all major G7 yield curves.
At the same time, inflation concerns, particularly fears of secondround effects from higher oil prices, were reassessed. Inflation breakeven rates declined, signaling softer inflation expectations, while real yields edged slightly higher, pointing to improved growth expectations. Together, these dynamics supported a shift away from stagflation fears toward a narrative of resilient global growth. The US economy remains a key driver, with recent labour market and consumer data continuing to surprise positively.
Against this backdrop, our overweight in investmentgrade credit benefited from tightening spreads, while our allocation to covered bonds added stability and carry. Maintaining a neutral duration stance helped avoid unnecessary volatility during a period of geopolitical uncertainty. Looking ahead, markets will focus on the progression of the USIran diplomatic talks. While risks remain, falling tail risks and improving macro signals support a constructive, yet selective, risktaking approach.