By Gregory Gizzi

01 May 2026

Executive summary

The first quarter of 2026 was dominated by a geopolitical crisis that reshaped global financial markets and economic expectations. The escalating US-Israeli war with Iran, culminating in Iran’s blockade of the Strait of Hormuz, triggered an energy shock that sent crude oil prices surging nearly 50% and repriced inflation and interest rate expectations across global markets.

The impacts varied across regions. US risk assets demonstrated relative resilience, with a late-March relief rally cushioning their overall decline. Bond markets suffered, with yields surging across developed economies, including the 10-year German bund crossing the 3% threshold and the 2-year US Treasury yield approaching 4%, as investors seemed to abandon hope for rate cuts from the US Federal Reserve (Fed) in 2026.

The diplomatic back and forth between the US and Iran has kept markets on edge. A ceasefire provided relief heading into 2Q26, but as its terms are tested, markets are likely to continue whipsawing until a permanent resolution is in place.

Treasury markets find themselves in a delicate balancing act.

The 10-year Treasury yield trades in a range vulnerable to breakouts in either direction, as elevated crude prices suggests growth and employment concerns are beginning to offset inflation fears. The markets are increasingly weighing the two-sided risks of the Middle East conflict, with tighter financial conditions and growth concerns gaining prominence over pure inflation worries. Traders pricing the likelihood of Fed rate cuts have dramatically reduced and fluctuating Treasury yields reflect the market’s low conviction on the macroeconomic path.

Entering 2Q26, recession probabilities have edged higher to near 40%, with the market growing cautious about committing capital when macro fundamentals are overshadowed by geopolitical developments. However, recession is not our base case. The challenge for investors, in our view, will be in navigating a period where the process of price discovery continues to unfold across commodity markets, while central banks remain policy-constrained by elevated inflation risks.

In this environment, we prefer dependable sources of income while remaining vigilant on exposures prone to outsized reactions to geopolitical, policy, and supply shocks.

Figure 1: Fixed income markets have turned more bearish in recent months

Sources: Nomura Asset Management, Bloomberg. All data are based on historical monthly index data from January 1973 to December 2025.

Investment strategy

Developments in the geopolitical landscape have increased the likelihood of disruptive events, yet our base-case conviction remains grounded in underlying economic fundamentals and prospects for Fed easing. Our approach emphasizes fundamental strength and selectivity, mindful of elevated tail risks while balancing the opportunity for attractive carry in the prevailing rate environment.

Fixed income market

Municipal bonds

• Market: We continue to favor credit and curve. The spread between the 2-year spot and 30-year spot on the municipal curve has steepened from 185 bps at the start of the year to 205 bps as of March 31, 2026, creating compelling value opportunities. We favor the long end to extract value from relative cheapness.
• Outlook: We anticipate continued strength in municipal credit quality, underpinned by solid economic fundamentals. Ultimately, for municipals to revert to a pre-Middle East conflict environment will require more stability in the Treasury market. As Treasury volatility moderates, rates are anticipated to trend lower through 2026, allowing municipal bonds to benefit from both curve flattening and spread compression. Any market volatility should be viewed tactically, with periods of weakness providing opportunities to enhance portfolio allocations.

Figure 2: A compelling opportunity in longer-term municipals

Sources: Nomura Asset Management, Bloomberg, Refinitiv LSEG. All data are based on historical daily yield data from April 1, 2016 to March 31, 2026.

Investment grade corporate

• Market: A 75-95 bps spread range is possible as the market absorbs a record $1.8 trillion issuance driven by refinancing, M&A, and AI-driven capital expenditures ($300bn+ from hyperscalers alone). Fundamentals remain solid despite geopolitical uncertainty, with supportive technicals from foreign buying, light dealer inventories, and minimal new-issue concessions.
• Outlook: We favor financials, utilities, energy, and communications on strong fundamentals and favorable supply dynamics. BBB-rated credits look particularly attractive as the market overprices downgrade risk. In technology, it’s not yet clear if cash generation will keep pace with AI buildout capital intensity
• Tail risk: Prolonged elevated oil prices could lead to stagflation or a recession.

High yield corporate

• Market: High yield has been resilient despite macroeconomic risks. The higher-quality portion of the market (59% BB-rated, 9% CCC-rated) includes 11% energy exposure, providing some insulation from the Mideast Middle East conflict. Heavy capital-intensive sector exposure and minimal asset-light allocation align with the HALO trade (hard assets, low obsolescence). With concerns around AI, software is only 3% of the market.
• Outlook: Energy and aerospace/defense benefit from tensions, while airlines, cruise lines, hotels, and housing are at risk from energy prices. Overall, we see strong fundamentals (earnings, balance sheets, low defaults) with attractive yields. Private credit should have a minimal direct impact on high yield. 1Q spread widening may create a compelling entry point if the conflict de-escalates.

Emerging markets debt

• Market: Pricing reflects fundamental differences, not fear contagion. The Iran conflict’s duration should determine its transient versus structural impacts, as Strait of Hormuz closures have disrupted ~20% of global crude and liquefied natural gas (LNG). Energy exporters have benefited, while importers face headwinds.
• Outlook: Geographic differentiation favors insulated regions such as Latin America (Mexico, Brazil, Argentina) over Asia and other markets dependent on Middle East energy. Hard-currency sovereigns face fiscal discipline tests amid election pressures. The technical picture is better than perceived, with structural dollar diversification flows, light supply, and higher real yields than developed markets.

Investment grade private placements

• Market: 1Q saw volume of $35bn+, with more than 40% in infrastructure and asset-based finance. In digital infrastructure, private structures offer execution certainty that volatile public markets cannot match.
• Outlook: We believe the illiquidity premium is compelling, with 170+ bps origination spreads and 5.7%+ yields. Structurally supported digital infrastructure has room for growth. A structural shift is taking place, as capex-heavy industries require patient capital with customized covenants. Origination discipline matters more than market timing, in our view, given regulatory-constrained bank balance sheets.

Figure 3: Rates have moved dramatically since the start of the war with Iran, but spreads have not

Sources: Nomura Asset Management, Bloomberg. All data are based on historical monthly index data from January 1973 to December 2025. February 27, 2026 is denoted as the start date for the conflict, with “before conflict start” denoting the period 12/31/25 – 2/27/26 and “after conflict start” denoting the period 2/27/26 – 3/31/26.

Securitized credit

We favor a fundamentals-driven quality positioning, avoiding credit deterioration while capitalizing on structural opportunities.

• Commercial mortgage-backed securities (CMBS): Trophy property fundamentals are improving faster than pricing reflects. Manhattan Class A office shows 3%+ rent growth with significant leasing increases. Single-asset, single-borrower structures in well-located, modern buildings provide 20-30 bps spread advantages, adequately compensating for concentration risk.
• Agency MBS: The sector provides the cleanest risk-reward across securitized credit, in our view. Sound housing fundamentals, Fed structural support, and anticipated bank re-engagement drive buying against negative net issuance. Spreads are cheap relative to volatility. We favor premium/discount coupons over belly structures offering limited pickup for higher convexity risk.
• Collateralized loan obligations (CLOs): Manager selection is critical amid software sector stress and widening BB-rated spreads. Higher-quality managers with strong credit enhancements can offer compelling risk-adjusted returns in floating-rate structures benefiting from higher rates.

Sector views

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