Key points
- Fixed income markets generated positive total returns in February as concerns over AI-driven disruption contributed to safe-haven demand for government bonds. Credit spreads widened amid macro uncertainty, AI-driven sector repricing, tariff announcements and geopolitical risk, but strong fundamentals, attractive all-in yields, diversification potential and investor demand should continue to provide support for investment-grade bonds.
- US and Israeli military strikes on Iran began on 28 February, marking a major escalation in a long-running confrontation. Bond markets experienced a brief “flight-to-safety” rally, but this quickly reversed amid concerns about an energy-driven supply shock raising inflation expectations and constraining central bank easing. The US Federal Reserve and Bank of England are now expected to cut rates less than twice over the rest of the year, while the European Central Bank is priced for hikes for the first time since early 2026 and the Bank of Japan is still expected to raise rates at least twice this year.
- The US Supreme Court invalidated the Trump administration’s use of the International Emergency Economic Powers Act to impose tariffs, prompting a shift to a temporary import surcharge under Section 122 of the Trade Act. This allows tariffs of up to 15% for 150 days and, while largely untested, preserves most of the previous tariff framework. Further tariff actions are likely once the 150-day window expires, and ongoing lawsuits from companies seeking to recover tariff payments are keeping trade policy squarely in focus for markets.
- Gilts outperformed other developed market bonds, buoyed by the Bank of England’s dovish stance, rising unemployment and expectations of future rate cuts, though these expectations shifted quickly after the Iran strikes. Despite improved headline inflation, core inflation remains above target, suggesting policymakers are prioritising economic stability over immediate progress on inflation.
