Castle Securities: Bonds Regain Role as Risk Hedge Amid Middle East Tensions

Castle Securities has highlighted a shift in investor focus from inflation to slowing growth, as concerns over escalating Middle East tensions rise. According to Jin10, Nohshad Shah, Head of Fixed Income Sales for Europe, the Middle East, and Africa at Castle Securities, noted that the market is nearing a turning point across asset classes. From the end of last month until mid-last week, changes in interest rates and the dollar accounted for about 56% of the tightening of financial conditions, while risk assets accounted for about 44%. However, this pattern has since reversed, with risk assets now driving approximately 61% of the tightening, indicating a market shift from pricing inflation shocks to pricing growth risks. Global bond markets have generally declined this month. While traders previously focused on the inflationary impact of rising energy prices, some major bond management firms on Wall Street are increasingly betting on a decline in yields, expecting that a prolonged conflict will weigh on economic growth. Shah stated, "As growth concerns become more pronounced, long-duration fixed income assets should begin to act as a hedge against risk assets." He added that a prolonged conflict could lead to "demand destruction" through two pathways: persistently high energy prices and significant policy tightening by central banks to curb inflation expectations.