Credit markets have remained remarkably composed in the wake of renewed tensions in the Middle East and ongoing hostilities over the weekend. But let’s be clear: a drawn-out conflict would be a clear negative for risk appetite.
Geopolitical tensions are shaking up the investment landscape, creating clear winners and losers across credit sectors. While some industries are poised to benefit, others are grappling with headwinds from shifting demand and sharp swings in commodity prices. Oil prices have already spiked, fueling strong demand in the energy sector.
In the high-yield space, spreads widened slightly but trading remained orderly late last week. The primary market paused midweek, with no new deals from Wednesday to Friday, but activity picked up this morning as news of Iran seeking de-escalation talks with Israel steadied prices and boosted supply. Our high-yield and investment-grade teams remain disciplined, zeroing in on sector-specific risks. Right now, our attention is squarely on airlines, energy, chemicals and defense.
Airlines: Consumer demand is holding up, aside from some recent softness at the high end (i.e., premium services). But if oil prices stay elevated, fuel costs will squeeze margins—especially for value carriers with less room to maneuver. While consumers have so far absorbed higher ticket prices, there’s a limit to their tolerance if costs keep climbing.
Energy: Oil price volatility is back, but the impact varies across the value chain. Energy is just 2%-3% of our index, so the direct effect is limited. Upstream drillers, especially those exposed to Saudi rig activity, could face disruptions, but higher prices are a tailwind for producers. Midstream companies are generally best insulated, unless demand destruction hits volumes. Downstream players could face margin pressure if end-user demand falters at higher prices.
Chemicals: Volatile oil prices mean higher input costs. While companies may try to pass these on, doing so could dent end-market demand.
Defense: Elevated tensions could drive up demand for both cyber and physical security, benefiting select defense names.
In the bank loan space, spreads remain steady—current loan spreads are at +408 bps, barely budging. Historically, it takes a sustained period of geopolitical stress to move this market. From a portfolio positioning standpoint, we’re not making any major tactical shifts for now. In airlines, we’ve trimmed exposure to only blue-chip issuers. In chemicals, we exited early due to rising leverage and a weaker growth outlook, and we’re staying on the sidelines. Our energy exposure is focused on select midstream names with disciplined balance sheets. Should the conflict in the Middle East escalate, we would expect opportunities in defense to grow.
In the CLO space, spreads are only modestly wider—top-tier tranches (AAA/AA) are 1-2 bps out, while BBs are off about a quarter point, mirroring the move in loans. Commodities and defense have minimal direct exposure in CLOs, so sector impact is muted. If volatility persists, we expect BBs to underperform.
In the commercial mortgage-backed securities (CMBS) market, the Middle East conflict has had limited impact so far, with the market in wait-and-see mode. Spreads softened slightly last week. Looking ahead, CMBS will likely track broader credit risk sentiment. Sector-specific fallout should be limited, though a spike in oil prices could pressure utility costs and coverage ratios. Ultimately, rates and overall risk appetite will drive spreads and valuations.
In Closing
Credit markets are steady for now, but we’re staying vigilant. However, a prolonged conflict could quickly change the landscape, and we’re ready to pivot as needed.