Sovereign bonds may be on the verge of regaining their traditional safe-haven status if geopolitical tensions linked to the Iran conflict escalate further, according to fund managers and analysts cited by Reuters. The shift in outlook comes after bonds failed to provide meaningful protection during the initial stages of the war, even as global equities surged to record highs.
Reuters reported that world stock markets initially dipped when the conflict began but quickly recovered, supported by strong corporate earnings and continued enthusiasm for artificial intelligence-driven growth. In contrast, government bond markets have struggled, with inflation concerns and rising borrowing costs pushing yields to multi-year highs in several major economies.
Despite the weakness in performance, investor demand for bonds has not disappeared. According to fund flow data cited by Reuters, approximately $12 billion has moved into developed-market government bond funds since the start of the conflict, accounting for all net inflows this year. However, returns have remained negative across major benchmarks, with 10-year U.S. Treasuries and German Bunds both posting losses since late February as yields rose sharply.
Market data referenced by Reuters shows that safe-haven U.S. Treasuries have delivered negative returns of around 1.5% over the period, while German 10-year Bunds have fallen by approximately 2.4%. By contrast, equities have posted strong gains over the same timeframe, underscoring a significant divergence between stock and bond performance during the crisis.
Investor positioning reflects this tension. A Bank of America survey cited by Reuters found that global fund managers are currently the most underweight in bonds since 2022, suggesting that fixed income has become a contrarian positioning trade. At the same time, elevated equity valuations—driven in part by large technology companies—have raised concerns that stock markets may be increasingly stretched.
Fund managers quoted by Reuters said that rising bond yields have made fixed income more attractive from a valuation perspective, particularly in Europe and Japan, where yields have climbed to multi-year or multi-decade highs. Konstantin Veit, a portfolio manager at PIMCO, told Reuters that global fixed income markets now appear attractive across multiple jurisdictions and questioned the strength of the equity outlook at current levels.
The future direction of bond markets is closely tied to developments in the Iran conflict, particularly the status of key energy supply routes such as the Strait of Hormuz. Reuters reported that if the waterway were to remain disrupted or close for an extended period, oil prices could rise sharply, potentially exceeding $100 per barrel and triggering a new inflation shock. Such a scenario could initially pressure markets but ultimately shift investor preference back toward bonds if growth expectations weaken.
Analysts cited by HSBC Private Bank in comments reported by Reuters said that inflation pressures linked to supply chains and energy costs are already visible in global data, but that growth risks may be underpriced by markets. They suggested that bond yields could decline once inflation peaks and economic slowdown concerns become more prominent.
In more severe scenarios, fund managers warned that a significant escalation of geopolitical risk could reinforce the defensive role of sovereign debt. Andrew Sheets, global head of fixed income research at Morgan Stanley, told Reuters that a sharp increase in oil prices—potentially into the $130 to $150 per barrel range—would likely lead to falling yields as markets begin to price in a stronger negative impact on global growth.
Beyond oil markets, Reuters reported that broader geopolitical risks, including tensions involving Taiwan or disruptions in semiconductor and rare earth supply chains, could also support demand for bonds. Such disruptions would directly affect corporate profitability, particularly in the technology sector, and could weaken equity markets more broadly.
Central bank policy remains another key factor influencing the outlook. Reuters reported that markets are already pricing in potential Federal Reserve rate hikes, which could further impact risk assets if inflation proves persistent. Analysts cited in the report suggested that an aggressive tightening cycle would likely weigh on equities and reinforce the relative appeal of fixed income.
While bonds have so far underperformed equities during the Iran conflict, Reuters reported that many investors expect their traditional safe-haven role to re-emerge if geopolitical shocks intensify or if inflation begins to undermine global growth momentum.
