Are bonds still the answer to the income problem?

Having initially expected central banks to cut interest rates in 2026, investors now face a hawkish pivot after the European Central Bank (ECB) hiked rates at its June meeting.

The conflict in Iran has driven a sharp repricing at the front-end of rates markets, pushing central bank expectations from cuts to hikes in a matter of weeks. While the reaction is understandable given the inflationary impact, the scale of the move has left front-end yields on a more attractive footing.

UK government bond yields have pushed higher this month as markets have digested a building political crisis, with the prime minister, Sir Keir Starmer, now set to face a Labour Party leadership contest following dire local election results on May 7.

With the Middle East conflict clouding the outlook for inflation and interest rates, TwentyFour Asset Management’s Doug Charleston explains why asset-backed securities (ABS) could be a valuable diversifier for fixed income investors looking to deal with further volatility.

Since their introduction in 2013, AT1 bonds have acted as a valuable kicker for many fixed income funds, having consistently delivered excess return over more mainstream credit markets such as high yield bonds over the medium term.

With tensions in the Strait of Hormuz increasing over the weekend and markets getting used to oil prices well in excess of $100 per barrel, this seems an opportune moment to zoom out and look at the state of play in fixed income markets, considering the unsettling reality of a longer-than-expected conflict in the Middle East.