Yield Bets Pay Off for Traders Willing to Tune Out War Risks

(Bloomberg) — Those credit investors who gambled on higher-yielding corporate bonds in the midst of the Iran war are looking increasingly vindicated as markets rebound on hopes of a lasting truce.

The decision to buy bonds as Iran and the US exchanged missile-fire was always a high-stakes one. It required a belief that a spike in overall yields on the back of rising government borrowing costs would be enough of a buffer against a prolonged energy shock and the threat of inflation.

The trade to lock-in higher levels of income is now paying off for portfolio managers on both sides of the Atlantic. Index returns for investment-grade bonds denominated in euros — a yardstick of the market’s overall performance — are heading for their best month in more than a year while junk bonds in the single currency haven’t gained this much since 2023. There have been similar swings to positive from negative in the US.

“Over March we’ve seen a pretty significant repricing,” said Olivier Monnoyeur, Portfolio Manager, Euro high yield credit fund, BNP Paribas Asset Management. “That’s the key shift — the entry point is now more attractive.”

Higher bond yields give investors more room for returns: they provide stronger income and the potential for price gains if yields fall from their peaks. For those who expected the broader market impact of the conflict to be limited, the recent selloff opened a buying window.

Heavyweight investors such as Blackrock Inc. have been sanguine about the health of corporate Europe, as long as the disruption to markets is short lived.

“Higher yields are providing a cushion for income investors, and history suggests markets can absorb temporary shocks without widespread downgrades or defaults,” James Turner, the firm’s head of global fixed income for EMEA, said.

Last month saw yields on the Bloomberg Euro Corporate Index of investment-grade bonds jump by as much as 70 basis points from the end of February — before the war began — reaching more than 3.8% at their peak. Currently, they’re at 3.5%.

The shift was fueled largely by climbing government bond yields, rather than credit spreads, as markets recalibrated interest rate expectations amid the turmoil triggered by the war. German bund yields climbed to the highest since 2011 last month and are still trading close to that point. Meanwhile, traders expect two quarter-point rate hikes by the European Central Bank this year, with the first to come in June.

By contrast, credit spreads have remained well below the historical averages of recent years, having widened by only 16 basis points since the conflict started. In April 2025, they jumped to as much as 128 basis points following the volatility triggered by President Trump’s ‘Liberation Day.’

“It’s just the higher yields that are keeping investors coming back,” said Alex Temple, a portfolio manager at Allspring Global Investments. “That’s what’s really helped cap any spread move.”

In addition to demand from yield-hungry investors, spreads have remained supported by the money flowing into credit funds over the course of 2025. That helped risk premiums grind tighter while a recent reversal of outflows this month has meant portfolio managers have so far avoided forced selling.

In the seven days to April 15, there were inflows across most categories of European credit funds for the first time since March, according to a note by Barclays Plc citing EPFR data. The biggest gains were in short-duration investment grade while pan European high-yield funds saw their biggest inflow since the start of the war.

Still, there remains much uncertainty over the longer term fallout from the conflict in the Middle East. That’s particularly relevant for corporate bond markets given the fairly muted response of credit spreads, the premium that compensates investors for an individual company’s default risk.

The specter of inflation driven by rising energy costs, as well as slower economic growth, are key concerns among bond investors, according to the latest quarterly survey from the International Association of Credit Portfolio Managers. Those fears are fueling expectations of spread widening and defaults, the survey said.

“Our latest thinking is that even in a scenario where there is a compromise deal relatively soon, we don’t see oil going much below $80 in the coming six months,” Mark Dowding, chief investment officer at RBC BlueBay Asset Management, wrote in a note.

The shock from inflation and subsequent hit to economic growth are events that “have already baked into the system,” Dowding added.

With spreads still near the tighter end of their historical ranges, any sustained hit to growth or a renewed surge in energy prices could yet force a sharper repricing, leaving credit investors exposed to losses that income alone may not offset.

Those concerns last week prompted JPMorgan Chase & Co. strategists Matthew Bailey and Daniel Lamy to recommend putting on a hedge against a potential blowout in spreads, using an iTraxx Main payer option.

“Euro credit spreads are pricing a close to best-case scenario, and, consequently, we believe the risks are asymmetric to the downside,” they wrote.

(Updates with Mark Dowding comments from the 16th paragraph)

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