Geopolitics upset a vulnerable equilibrium

Fixed income investors entered the year with strong early gains, only to see momentum disrupted as the Iran conflict and a spike in oil prices revived inflation fears. Instead of a classic “flight to safety,” markets shifted into an “inflation-on” regime, with shorter-term yields rising, the curve flattening and earlier bond gains largely erased, even as equities sold off more sharply. Against this backdrop, Federated Hermes made tactical duration and curve adjustments while staying cautious on higher-volatility spread sectors such as high yield and emerging markets.

Key uncertainties now center on how durable the ceasefire in Iran will be, whether oil prices can stabilize without undermining growth and how private credit stress might spill over into public markets. With political risk elevated and stagflation concerns lingering, remaining underweight richly valued spread sectors while focusing on quality duration exposure appears prudent as second-quarter themes take shape.