Middle East tensions are shaking bond markets, but stronger fundamentals than in 2022 may support short-duration bonds. Here’s how investors can navigate the uncertainty.
How has the conflict in the Middle East impacted your views?
The crisis in the Middle East has triggered energy price spikes and inflation concerns. Gilts have been hit particularly hard, with yields surging as markets priced in a series of hikes from the Bank of England this year.
By 23 March 2026, gilts were on track for their worst month since the 2022 mini-budget, which followed another geopolitical crisis, namely Russia's invasion of Ukraine. However, comparing the current situation to 2022 misses a vital point: bond markets, central banks and inflation are all in a completely different place today.
The aggressive hiking cycle of 2022 was a perfect storm for fixed income. On the eve of the Russian invasion, the Bank of England base rate was 0.5%, real yields were negative, inflation had been surprising to the upside for 12 to 18 months and central banks had been dismissing the inflation risk as transitory.
By contrast, before the strikes against Iran, inflation had been falling for the past two years (although not as fast as central banks would like). Financial conditions are not tight and central banks have more credibility now than in 2022; the market believes they are alert to the inflation threat.
At this juncture, the risk we are most concerned about would be governments introducing significant fiscal stimulus in response to higher energy prices. That would remove the growth shock tail risk but keep the inflation risk in place, which would be bad for duration.
Absent that, we expect duration and government bonds to trade better from here, as the starting point of higher policy rates (positive real rates), weaker labour market dynamics, declining wages and inflation being closer to target represents a complete contrast to 2022.
How do you expect short-duration bond funds to fare in a higher-for-longer environment?
Fixed income investors have nothing to fear from a series of gradual rate hikes, in my view, because of the cushion that starting yields provide today. At the start of 2022, 1-5yr sterling investment-grade credit (the core of the Artemis Short-Duration Strategic Bond Fund) yielded just 1.7%, compared to 5.4% as of 20 March¹. This not only transforms the distance that yields need to rise in a more inflationary/uncertain environment, but it also transforms the ongoing carry being produced from a portfolio like ours.
In addition, our fund's focus on shorter-dated credit means it is well set up for any potential widening in yields. Due to its low duration, the capital moves on the short-dated part of the market are meaningfully less negative than on longer-dated bonds.
What is the rationale for combining corporate and government bonds within one fund?
A portfolio combining credit and rates strategies should generate a much less volatile stream of returns over time, which is the rationale for strategic bond funds. We have found that our corporate and government bond holdings rarely lose money in the same month, which helps to smooth out our returns.
The bulk of our Artemis Short-Duration Strategic Bond Fund is held in short-dated investment-grade corporate bonds. This core exposure is complemented by high yield and government bonds. High yield has been the best-performing part of the fixed income universe over the past five years, due to the higher coupons and the power of compounding interest.
Within the rates sleeve, we look for dislocations in global government bond markets and implement our views through relative value pairs trades. As such, this module tends to have the most opportunities when markets are volatile and dislocated. Current market conditions are generating a wealth of opportunities which we aim to actively trade, helping provide an alternative and complementary source of returns alongside the short-dated credit that makes up the core of this portfolio.
Find out more about the Artemis Short-Duration Strategic Bond Fund
Notes and references
1 Source: ICE BofA indices as of 20 March 2026
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