Ceasefire brings relief, but outlooks remain complex

Key takeaways

• Bond market volatility remains elevated despite ceasefire relief
• Credit markets show resilience
• Emerging markets face pressure from higher oil prices and a stronger U.S. dollar

Geopolitical developments in the Middle East continued to shape markets this week, though signs of a ceasefire provided some relief across both equity and fixed income markets. The U.S. 30-year Treasury yield declined roughly 10 basis points from levels approaching 5%.

Beyond the headlines, underlying signals in fixed income markets point to a more complex picture.

The U.S. yield curve remains historically steep. The spread between 2-year and 30-year Treasury yields has flattened only modestly, from around 130 basis points at the end of January to roughly 110 basis points today. This limited move suggests that investor concerns around growth and recession risk remain in place.

At the same time, bond market volatility has been elevated. The MOVE Index, a key measure of rate volatility, rose sharply in recent weeks before easing following ceasefire news. Even so, sustained volatility at higher levels can signal rising risk premia and continued uncertainty in fixed income markets.

Despite heightened volatility in rates, credit markets have remained relatively stable.

High-yield spreads widened modestly, from around 290 basis points in late February to roughly 330 basis points at their peak, but have since retraced back toward earlier levels. This resilience reflects a combination of still-strong corporate fundamentals, attractive all-in yields and relatively low default expectations.

Interestingly, the relationship between energy prices and credit spreads has shifted. While high-yield spreads and oil prices typically move together, that correlation has recently turned negative, highlighting the more idiosyncratic nature of the current geopolitical shock.

Another structural theme to watch is the impact of AI-related disruption. While concerns have emerged, particularly in private credit markets where software exposure is higher, there is limited evidence so far of spillover into public credit markets.

The outlook for emerging markets has become more challenging in recent weeks.

Higher oil prices and a stronger U.S. dollar are creating headwinds, particularly for energy-importing economies. In many emerging markets, food and transportation account for a significant share of inflation, increasing sensitivity to energy price shocks.

Policymakers are already responding in some cases, while market dynamics are also shifting. There are early signs that some countries may be supporting their currencies through adjustments in U.S. Treasury holdings, which could have implications for global rate markets.

While the broader emerging market story is not fully reversed, the transmission of higher energy prices into inflation, growth and currency stability will be an important factor to monitor.