Ceasefire brings relief, but outlooks remain complex

Hi and welcome to Russell Investments market weekend review for the week of Friday, April 10th. My name is Rudy Samanta and I'm the global co-head of fixed income at Russell Investments. Looking back over the past week, three major themes stood out for investors. Naturally, much of the market's attention has been widely focused on heightened volatility stemming from geopolitical developments in the Middle East over the past 5 weeks. While news of a ceasefire and some deescalation brought welcome relief across bond and equity markets, with the 30-year Treasury yield falling roughly 10 basis points from levels approaching 5%, we believe that there are more fundamental shifts underway that extend beyond recent headlines. One area that we continue to watch closely is the shape of the US curve. In my last market weekend review from the end of January, we highlighted the historically steep level of the 230s curve, which stood near 130 basis points at the end of January. Today, after the volatility we've experienced, that slope has flattened only to around 110 basis points. Now, this small flattening suggests that beyond political events, investors remain concerned about potential growth and recession risk. The front end of the curve continues to be anchored by lower expectations for near-term rate cuts, while movement in the long end reflects uncertainty either around lingering inflation risks or the possibility of a more pronounced economic slowdown. On the inflation front, core inflation continues to hover around 3%. And while a stronger than expected jobs report in March offer some reassurance on growth, worries about a K-shaped recovery leaves the outlook for recession risk somewhat mixed. Against this backdrop in our fixed income portfolios, we continue to remain defensive on credit with the lower spread duration bias and maintain a modest positive active interest rate duration position. Another important sentiment indicator we track is the move index, a measure of implied volatility in bond markets. Since February 28, the move index has risen roughly 57%, climbing from levels around the 70s to a peak near 115. The recent news and potential ceasefire did rapidly bring this back down to the high7s, but historically sustained volatility in the move index itself has been a timely signal of rising risk premier in bond markets. And we continue to monitor this closely as an important gauge of rate volatility and uncertainty. Beyond rates, a key question has been how elevated bond volatility and uncertainty have translated into credit markets. Two features have stood out. First, overall credit markets have remained surprisingly muted and resilient. While high yield spreads widened modestly from around 290 basis points in the end of February to a peak closer to 330, they have already retraced back to their February levels. Importantly, while high yield spreads and energy prices often move together during this particular bout of volatility, the three-year rolling excess correlation uh excess return correlation beyond high yield and oil futures actually turn negative. This appears to reflect the highly idiosyncratic geopolitical nature of the recent oil price move alongside continued strength in corporate fundamentals, attractive volals and still low default expectations anchoring credit spreads. A second and more structural credit theme has been the impact of AI related disruption particularly in private credit markets and its potential implications for public credit. Much has been said about pressures on software business models, but it's notable that while software accounts for roughly 23% of direct lending exposure and about 26% of the top 10 business development company or BDC portfolios, it represents only 3% of the public high yield market. As a result, AI related disruption has so far remained largely contained within private markets without clear signs of contagion into public credit. Over the longer term, however, we remain watchful of spillover risks, particularly from lenders who are active in both private and public markets, such as insurance companies, where liquidity or funding pressures on the private side could eventually influence behavior in public credit markets. Finally, turning to emerging markets, at the start of the year, we were broadly constructive on the outlook. Several countries entered 2026 with credible records of fiscal consolidation, disciplined central bank policy, and well-managed inflation dynamics through 2025. That picture while not completely res reversed has become much more challenged by the twin forces of higher oil prices and a stronger US dollar particularly for large emerging market oil importers. Food and transportation constitutes 40 to 55% of the CPI basket across several major EM markets such as Brazil, India, Thailand and Turkey. In countries such as Malaysia and Thailand, policy makers have even experimented with measures like 4-day work weeks to try to address rising energy costs and inflation pressures. Interestingly, initial initial data on March US Treasury auction activity suggested that some of the larger oil importing nations were defending their currencies through selling activity on shorter tenor US treasuries. As rate volatility has somewhat subsided, April Treasury auction data has been better supported. But the impact of emerging market currency management on demand for US treasuries and rate outcomes will be another important factor to consider. Looking ahead, the duration of disruptions in the state of Hormuz will be a key variable. But more generally, the transmission of this energy shock into the real economy will be a critical watch point for our emerging market outlook. With that, I will conclude my comments today and look forward to joining my colleague at market weekend review next week. Hi, I'm Sophie Antal, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.