Bonds in Brief: Making Sense of the Macro — January issue

What are we watching?

• Iran. Geopolitical risk remains elevated as major unrest in Iran coincided with an active military exchange between Iran and Israel, with both sides trading strikes and markets pricing a higher geopolitical risk premium. Oil prices spiked following these escalations, reflecting concerns about potential disruption risks around the Strait of Hormuz even if worst‑case scenarios remain a small tail risk. While Iran retains meaningful proxy and missile capabilities, the broader worry is that any misstep could draw the US more directly into the conflict, raising the tail risk of a wider regional confrontation and keeping volatility elevated across energy markets and risk assets.
• Accelerating global growth. The latest data continues to support a “Goldilocks” scenario of continued growth and inflation normalising towards 2% across most developed markets. However, this narrative rests on a series of narrow assumptions, and the failure of any one of these could derail this scenario. The risks to the downside include an unexpected downgrade in growth expectations or productivity enhancements from AI; the private sector reacting to increased fiscal stimulus by boosting savings; an unexpected geopolitical shock; and potentially tighter financial conditions if policymakers try to rein in inflation or if bond markets respond to government policies they view as inappropriate by increasing long-term interest rates, as we’ve seen recently in Japan.
• Japanese policy and the US dollar. Heavy trading after the Bank of Japan’s 23 January policy meeting prompted rumours of coordinated Japanese and US intervention to stop the yen weakening versus the US dollar. Rumours intensified after reports that the US Treasury had requested a “rate check”, which could mark the start of a more explicit weaker-dollar policy stance. Together with renewed tariff threats and concerns about the US institutional framework, this could further accelerate diversification away from US assets.
• Fixed income flows remained strong, with European investors allocating more than €350 billion to the asset class in 2025. According to Morningstar, active fixed income strategies made up €310 billion of this flow, exceeding 2024’s €259 billion and highlighting a growing shift in asset allocations as investors diversify away from other asset classes and look to address concentration, particularly in US equities. Many of our institutional and wealth clients remain underweight in fixed income in their strategic asset allocations and any further shifts towards fixed income could result in significant flows into bond markets, representing a positive tailwind.