2Q26 fixed income quarterly outlook
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.
Sources: Nomura Asset Management, Bloomberg. All data are based on historical monthly index data from January 1973 to December 2025.
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.
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.
We favor a fundamentals-driven quality positioning, avoiding credit deterioration while capitalizing on structural opportunities.
Content contributions from the Nomura Asset Management International Fixed Income Team
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