Investors pour $12B into bonds despite losses from Iran war

Bonds Eye Safe-Haven Return as Iran War Fuels Inflation Fears

Fund managers are growing increasingly optimistic that government bonds could reclaim their traditional role as a portfolio hedge, even after sovereign debt has delivered losses since the Iran conflict began in late February. The contrarian bet hinges on an expectation that inflation pressures driven by the war may be nearing a peak — and that any slowdown in growth could bring bonds back into favor.

Losses Have Not Deterred Buyers

Since U.S. and Israeli strikes on Iran at the end of February, 10-year Treasuries have returned negative 1.5% and German Bunds have returned negative 2.4%, according to Reuters reporting from Milan on Monday. Yet investors have poured roughly $12 billion into developed-market government bond funds over that period, representing all net inflows for the year to date, Lipper data shows.reuters

The disconnect reflects a contrarian stance. The most recent Bank of America global fund-manager survey found investors hold their least overweight position in bonds since June 2022. Meanwhile, borrowing costs have surged to multi-year highs — Germany’s 10-year Bund yield touched 3.12% in late April, its highest since the eurozone crisis of 2011, and it remains near that level at approximately 3.07%.mezha

Yields Draw a New Audience

PIMCO portfolio manager Konstantin Veit said that “from a global perspective, fixed income markets appear very appealing; this holds true even for regions traditionally viewed as less attractive, such as Europe and Japan”. Japanese 10-year government bond yields have reached their highest in nearly 30 years, adding to the case that bonds now offer meaningful income for the first time in a generation.mezha

Strategists at HSBC Private Bank noted that “inflation is already evident in global statistics, with risks of secondary effects emerging from supply chains and input costs,” but argued that “growth markets seem less fully priced in, suggesting that bond yields may decrease after inflationary fears peak”.mezha

The Oil Wildcard

The Strait of Hormuz remains at the center of the inflation debate. If the strait reopens fully, rate-hike expectations could ease and provide a tailwind for bonds. If it stays constrained, oil above $100 a barrel could deepen the economic drag that would ultimately make bonds more attractive as a recession hedge.mufgamericas

Andrew Sheets of Morgan Stanley acknowledged that “bond diversification has been underwhelming thus far” but said the firm anticipates “improvements that will become more apparent when circumstances demand it”. For now, fund managers appear willing to endure near-term pain for what they see as an eventual payoff.mezha