Fund Managers Buy Bonds on Iran War Growth Fears
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- Fund managers snapped up sovereign bonds following a sharp sell-off, betting that growth damage from the Iran war will outweigh inflation concerns and prompt central bank rate cuts.
- Royal London Asset Management bought three-to-seven-year gilts, with senior fund manager Ben Nicholl stating markets are underpricing future rate cuts due to growth shocks.
- JPMorgan Asset Management increased holdings of long-term debt across Europe, Asia, and North America, with Iain Stealey calling the initial inflation-focused market reaction 'overdone'.
- Schroders purchased Canadian government bonds, arguing that rate hikes priced into markets were inconsistent with weak fundamentals like a soft labor market.
- Morgan Stanley turned bullish on US Treasuries, with Andrew Sheets noting the market had overly focused on inflation while underestimating demand damage from the conflict.
- Short-term US inflation expectations rose from 2.5% to 3.1%, but longer-term five-year, five-year inflation swaps remained near 2.4%, signaling limited inflation fears over the medium term.
Why it matters: Bond investors are positioning for slower growth and potential rate cuts, meaning governments can borrow more cheaply if economies weaken. The shift suggests markets now see the Iran war’s economic damage as more consequential than its inflationary impact, altering the risk calculus for central banks and debt-dependent economies.
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