Photo: Svein Aanes © DNB

By Svein Aage Aanes, Head of Fixed Income Management at DNB Asset Management

In bond markets, the prevailing view seems to rest on the belief that the situation in Iran will ultimately lead to a lasting reopening of the Strait of Hormuz. Moreover, global economic growth is not expected to be seriously affected by a prolonged closure of the strait: growth forecasts for 2026 have been revised slightly lower, while those for 2027 have remained broadly stable.

Global inflation has already accelerated and is expected to stay elevated, driven by higher energy prices. Markets, however, appear to believe that modest, pre-emptive rate hikes from most central banks would be enough to prevent a sharp acceleration in underlying inflation — which is why inflation forecasts for 2027 have also remained relatively stable. These expectations were reinforced by recent reports that the United States and Iran have reached a preliminary agreement aimed at reopening the strait and moving toward more in-depth negotiations.

Several uncertainties nonetheless remain for the rest of 2026. The first concerns how durable this preliminary agreement will prove to be. In the short term, all parties may have an interest in respecting it — to restore energy supplies, and, from the US perspective, to calm the situation ahead of the midterm elections. Tensions could still resurface once negotiations on Iran’s nuclear programme and other sensitive issues actually get under way. We consider the market consensus plausible: the worst of the Iran conflict is probably behind us. Even so, fresh complications cannot be ruled out. Markets can absorb some bad news, provided the underlying growth scenario is not challenged too severely.

Elsewhere in credit markets, one notable divergence stands out: Nordic credit spreads have widened even as US and European high-yield spreads have remained tight. We believe the current resilience of credit markets overall is justified. In most economies there is little evidence of significant imbalances; growth is not particularly strong, but it remains solid, and corporate balance sheets stay broadly healthy, with earnings continuing to develop favourably. There is, of course, always a risk of deterioration, but that is not our base case at this stage.

Credit spreads remain relatively tight today, especially in investment-grade markets, which materially raises the risk of temporary corrections such as those seen in April last year and again in March this year. That said, since we do not expect a pronounced growth slowdown severe enough to trigger a more fundamental correction, we continue to believe corporate bonds can contribute to performance over a six- to twelve-month horizon.

As for Nordic high yield bonds, the sharp widening of spreads relative to the US and European high-yield markets is, in our view, clearly positive: the differential is now at the upper end of the range observed over the past seven to eight years.

Source: DNB Carnegie

This relatively pronounced widening of Nordic high-yield spreads versus Europe and the US gives investors an additional yield opportunity. It can either act as a cushion, as it did in March this year, or materialise through a narrowing of Nordic spreads, as seen in the first half of 2024.

One feature that sets Nordic bond markets apart from the larger European and US markets is their relatively short duration. The significant volume of floating-rate issuance creates many pure credit opportunities with very limited interest-rate risk, helping offset one of the factors behind the sharp bond-yield volatility of recent years.

For investors seeking stable returns, this combination may represent an attractive opportunity. It is also appealing from a diversification standpoint, allowing investors outside the Nordic region to gain exposure to a market with slightly different macroeconomic characteristics while diversifying at the issuer level.

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