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WHY CORPORATE BOND INVESTORS AREN'T LOSING SLEEP OVER THE MIDDLE EAST

Corporate bond fund managers, for the most part, seem surprisingly relaxed about the fighting in the Middle East. Markets appear to be pricing in a short, contained conflict, even as the Israel-United States war on Iran continues to escalate.

That calm hasn't been universal. Investors dumped U.S. Treasuries last week, driving yields to multi‑month highs as surging oil prices rekindled inflation fears. Crude's jump toward $120 a barrel rattled rate markets and underscored how quickly geopolitics can spill into broader financial conditions.

This week, Treasury yields have started to reverse that selloff.

Corporate credit, however, barely flinched. Spreads widened only modestly, suggesting investors remain comfortable with the idea that the conflict won't materially disrupt growth or corporate balance sheets — at least for now.

U.S. high‑yield credit spreads late Tuesday were 322 basis points (bps), narrowing from Friday's 328 bps, which was the highest level since May 2025, according to ICE BofA U.S. Corporate Index data. On Monday, it was 310 bps. Before the conflict, that spread was in the 250 to 260 bps area.

That said, Friday's number was nowhere near what bond investors would describe as "crisis levels".

For comparison, high yield spreads rose to 461 bps in early April in the days after "Liberation Day" when President Donald Trump imposed tariffs on imports around the world.

Ali Hassan, portfolio manager at Thornburg Investment Management, points out in an interview that credit spreads have been wider than 800 bps in various market dislocations in 2013, 2016, 2018, 2020. They were as much as 2,000 bps during the global financial crisis of 2008, he adds.

"Credit is not currently reflecting what I would call the fatter tails that you are getting from geopolitical events," says Danny Zaid, portfolio manager at TwentyFour Asset Management in an interview with Reuters.

"Part of the reason why spreads are not wider is because there is ample liquidity out there and investors are well positioned to essentially be buying the dip, which is what we have been seeing over the last year."

Thornburg's Hassan says the bond market is not pricing in the "permanent impairment scenario" where growth becomes the focus. "If growth is the dominant issue, then you should have the Fed cutting more."

U.S. rate futures have priced in just one Fed cut this year, or about 21 bps, from 55 bps before the war, according to LSEG estimates.

(Gertrude Chavez-Dreyfuss)

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