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The war in the Middle East has had a noticeable impact on interest rates worldwide. Developments in bond markets will also depend on the duration and intensity of the conflict. If both remain contained, fixed-income securities in Europe and the United States should continue to offer stable returns. “Those seeking higher yields may also find opportunities in emerging markets,” says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM.

The recent escalation in the Middle East has driven energy prices higher, followed by rising inflation expectations and bond yields. This is shifting the expected interest rate path in the euro area: whereas prior to the outbreak of the conflict markets had priced in hardly any further ECB rate moves, they now anticipate up to three hikes of 25 basis points each by the end of 2026. “In the short term, however, we still expect a largely neutral environment for euro sovereign bonds,” explains Fischer. “Yields have stabilised following their recent rise.”

The situation is more complex at the long end of the yield curve. Previously moderate inflation rates in the euro area continue to have a stabilising effect. At the same time, higher spending on infrastructure, defence and economic policy measures is increasing the structural financing needs of many member states. More debt issuance means more government bonds, which tends to push up yields, particularly at longer maturities.

Yields on ten-year German Bunds stood at around 3.0% in the second half of March, remaining at an elevated level. “If geopolitical tensions ease, a return to the previously established yield range of around 2.5% to 2.75% appears plausible,” Fischer notes. Within the euro area, differentiation is increasing: countries with high debt levels and expansionary fiscal programmes are likely to see more volatile yields, while core countries such as Germany and the Netherlands should provide stability. “Overall,” Fischer adds, “despite heightened uncertainty, we expect a largely neutral environment for euro sovereign bonds in the short to medium term.”

In the European high-yield segment, risk premia have edged up slightly in response to higher energy prices, rising inflation expectations and yields. Since the outbreak of the Middle East conflict, spreads have been around 335 basis points, still below their long-term averages. “However, relatively tight spreads limit the scope to absorb unexpected macroeconomic or financial shocks,” Fischer warns. Any stress is likely to emerge first in the private debt segment before spilling over into liquid high-yield markets.

European investment-grade corporate bonds have also seen a moderate widening of credit spreads. In the second half of March, risk premia stood at around 70 basis points, reflecting the strong fundamentals of many issuers and continued solid demand from institutional investors. Overall, Fischer expects a stable, neutral environment.

A similar picture is evident across the Atlantic. Yields on ten-year US Treasuries have climbed to above 4.35%, driven by geopolitical risks and structurally high government spending. Nevertheless, Fischer expects broadly neutral developments across maturities, particularly as market participants have pushed expectations of potential Federal Reserve rate cuts further into the second half of the year – if they materialise at all.

In the US high-yield segment, spreads have also widened slightly in recent weeks, standing at around 355 basis points in the second half of March – still below their long-term average. With yields of around 7.40%, absolute return levels remain attractive, while the stable credit quality of many issuers continues to support demand. Overall, US high-yield bonds are expected to remain neutral over both three- and twelve-month horizons. US investment-grade bonds show a similar pattern: “With yields of around 5.20%, the segment remains attractive for institutional investors,” Fischer concludes. “Our outlook here is also neutral.”

Emerging markets have not been immune to the military escalation. Yields on emerging market sovereign bonds have risen to an average of around 6.25% since mid-March. “However, averages are of limited significance in this asset class,” Fischer notes, as differentiation between hard currency and local currency bonds is increasing. Hard currency bonds closely track global interest rate developments and expectations for US monetary policy and are assessed as neutral in the short term. Local currency bonds, by contrast, benefit from attractive real yields, potential currency appreciation and the monetary policy flexibility of many central banks, which began tightening earlier and can now ease policy gradually.

At the same time, heterogeneity within emerging markets continues to increase. “Differences in economic fundamentals, debt levels and political frameworks are making broad generalisations increasingly obsolete and are raising the importance of active country and issuer selection,” Fischer explains. In Latin America, Brazil and Argentina in particular are benefiting from more stable conditions and robust commodity markets, while parts of South-East Asia are supported by solid growth dynamics and deeper integration into global supply chains.

Across all segments, the key takeaway is this: aside from the current geopolitical situation, conditions in bond markets are largely neutral, and in some areas constructively stable – offering attractive carry opportunities, but with limited buffers against unexpected turbulence.