The great divide over corporate bonds

By Joss Murphy on 7 May 2026 in Fixed income

In its response to the Iran war, the stock market has shown surprising resilience. Equities wobbled in the early stages of the conflict, but have now recovered their momentum. Corporate bonds have followed a similar trajectory. Spreads over government bonds widened early March, but have subsequently recovered. This has done little to dent a growing view that – like equity markets – corporate bonds may not fully reflect the risks in markets.

Going into the crisis, corporate bond spreads over government bonds were as low as they had been since before the Global Financial Crisis in 2008. There were sound reasons for this. Company balance sheets were generally strong, borrowing levels low, and earnings relatively high. The ‘all in’ yield for corporate bonds was attractive, supported by relatively high government bond yields. Investors had a good cushion.

Jack Willis, manager on the Liontrust Sustainable Future Monthly Income Bond fund, says:

The Iran war caused some short-term widening in spreads, but within weeks, they were back to where they were in early February. Nevertheless, there were nuances. Jack adds: “The reaction to the conflict has been more pronounced in Europe, given its more direct exposure to energy prices, higher operating costs for energy-intensive sectors, and the added pressure of shipping disruptions.”

However, he says, “after an initial widening, spreads regained some ground as the market reassessed the likelihood of a prolonged shock. Primary markets remain open, as shown by large transactions such as Amazon’s recent large bond issue.” He says high yield has seen a bit more volatility and dispersion but has still been resilient compared to equities. Chemicals, autos and real estate have been under the most pressure, reflecting their sensitivity to growth expectations and energy costs.

So, is the glass half empty or half full?

For corporate bond bulls, it shows their resilience in the face of volatility. For corporate bond bears, it is a sign that bond investors don’t fully appreciate the risks. Could inflation spike higher in response to the Iranian crisis? What would be the impact on corporate balance sheets? Might defaults rise?

David Coombs, manager of Rathbone Strategic Growth Portfolio, is firmly in the bear camp:

Dickie Hodges, manager of Nomura Global Dynamic Bond, has also been nervous about credit spreads during this period, and has bought credit default swaps to protect the portfolio. “We had substantial hedging in place going into the conflict. It has done its job in reducing volatility. These have been actively managed since the beginning of the conflict in order to lock in gains whilst maintaining a degree of protection.”

Lloyd Harris, manager of Premier Miton Strategic Monthly Income Bond, has also been relatively light on credit risk and relatively short duration in this environment. He says:

However, Jack Willis says that the volatility – however limited – has created opportunity. These tend to be idiosyncratic, rather than broad-brush trends. He gives the example of switching out of a junior bond in BT Group’s capital structure into a senior BT bond, where higher yield is available alongside improved structural protection*. For them it is “adding risk selectively where mispricing arises.”

Jeremy Wharton, manager of the IFSL Church House Investment Grade Fixed Interest fund, is also more optimistic: “European and US markets are still functioning well despite the volatility. Secondary market liquidity has been good and we have seen some large primary deals despite the volatility. Amazon came to market with a whopping $38 billion issue in the second week (Stellantis also issued €5 billion hybrids on the same day) and then a few days later sold €14.5 billion in a multi tranche out to 2064.” He sees particular opportunities in the UK:

The crisis has opened up opportunities in credit markets, but they are not universal. In aggregate, credit spreads look tight relative to history and do not always reflect the risks. The yields on offer from corporate bonds are still appealing, but having a good, careful active manager is particularly important in the current environment.

*Source: Liontrust, 20 March 2026