Webinar: Quarterly fixed income review and outlook | April 2026 | Insight Investment

Let me start by saying that the last five or six years have been nothing if not interesting.

We first had to deal with a pandemic, which obviously confused markets greatly about what was going to be the direction of growth and things like inflation.

Then, of course, we had to deal with a complete shakeup in the global trading environment and tariffs being put in place and then removed, and then delayed, and then put in place again. And more recently, dealing with what does it mean when energy prices go from $60 a barrel to over $100 a barrel. And questions start being asked by the markets and participants as to whether there might even be energy shortages in certain parts of the world.

So let me start with what has been really focusing our minds, which is what is going on with energy. And I guess the first thing we all learned, beyond the fact that anything that happens in the Middle East will have an impact on overall energy costs, is that there isn't a single oil price. That in fact, depending on where you're buying your oil from, you can get quite a different price point.

And so that is the first consideration when we're trying to think about how does this actually impact different economies around the world.

I think the second thing to say is that what we realized is that although markets are clearly pricing energy at a higher point today, if we look at what the market is thinking oil will cost, say, by the end of the year, the markets are actually viewing that the current situation in the Middle East will be fairly short-lived.

So by the time we get to December 2026, markets are expecting oil will cost more like $80 a barrel, which is considerably lower from the $100 current price point.

The other thing, which we're very aware of, is that the general population, whether they're in Europe, the UK, or the US, do not appreciate higher energy prices.

And in the US, the focus is very much on what gasoline costs. And we can see that in terms of how the price of gasoline has changed over the period since the beginning of the war at the end of February, it is absolutely a focus for the US administration to try and get those gasoline prices down, certainly well ahead of the November midterm elections.

So if we think about what are some of the sensitivities, I think it's also important to know that although Europe and the UK is going to be impacted by higher energy prices, it is really Asia that is most impacted.

So we put on the left-hand slide there, what does it look like in terms of how much energy, from an oil perspective, is coming through the Strait of Hormuz for countries like South Korea and Japan, which are the first two bars. But of course, it also impacts India, Singapore, and Thailand rather heavily.

And for those economies, although they should be able to pay more for their energy and therefore outbid other parts of the world, it will have implications for how much production can actually occur in those locations.

And I think another aspect to consider is an individual doesn't buy a barrel of oil. What you are impacted by are refined products.

And so the one that is being most discussed in our investment meetings is things like jet fuel costs, which you can see that jet fuel costs have gone from a rather sensible two and a half to three dollars a gallon globally. We are now looking at something closer to five and a half. So that's a considerable increase and clearly could have implications for what it costs even to do something like go on holiday.

And clearly that will impact the consumer price indices around the world.

When we think about Europe in particular, the issue is really around how the European Union in particular generates its electricity.

Because, of course, there has been a big move towards electrification rather than other sources of creating economic activity. And particularly, I've highlighted that oil and gas bar, but actually about 17% of that 20% bar is natural gas. Natural gas is an enormously important component of generating electricity in the EU.

And of course, the situation in Europe is that most of that natural gas is imported. And so you can see that in terms of domestic gas production, it's been steadily declining more or less since 1995.

So Europe is really vulnerable, but it's not so much on the barrel of oil problem. It is actually more of a natural gas problem for European industry.

So what have the markets been doing with all of this news flow?

Well, you can see here, these are different volatility indices. The VIX, which is the pale green line, is how volatile equity markets are, specifically looking at the S&P 500 in the US, but also looking at how volatile government bond markets are. And that is zeroing in on the US Treasury market.

And you can see that, of course, with the war starting at the end of February, those volatility indices have increased as markets have been rather nervous.

Now, if we updated that to today, some of that nervousness has been coming out of markets. But what's been going on in terms of expectations for interest rates has been really interesting to observe.

So of course, as you know, interest rates have been coming down in many of the major developed economies, Japan bucking the trend in this regard, has been putting interest rates up. But everybody else has been basically looking at inflation data, seeing inflation starting to come back in the right direction towards those targets, and of course, interest rates have fallen as a result.

But you couldn't have seen a bigger shift in expectations than we had on the back of this war beginning.

Now, if we just zero in on the UK, we went from expecting a couple of quarter of a percentage point cuts from the Bank of England over the course of the year, to actually at one stage expecting four interest rate hikes from the Bank of England over the remainder of 2026.

So clearly markets have been very, very focused on the idea that central banks might not be continuing with their cutting policy, and in fact be obliged to go in the opposite direction.

But there is a little bit of good news here when we think about what are the potential consequences of energy prices staying at around that $100 a barrel level.

It doesn't necessarily mean a big recession is on the horizon. And one of the reasons that is, is that actually, for most of the developed world, we've gotten really good at being more energy efficient.

And so we can generate quite a lot of growth in the economy with considerably less energy intensity.

So that's the good news.

The other thing is, when you're looking back at really long periods of time and trying to judge what price of a barrel of oil is a problem for markets, you actually need to inflation adjust that price.

So when we're looking at real oil prices, actually energy prices are not too bad, and you really need to see something like energy closer to, maybe closer to something like $150 a barrel before it becomes really problematic for economies to cope with that level of energy prices.

If we think about the inflation concerns, because clearly markets are thinking, "Okay, well, energy prices are higher, just mechanically, that will lead to higher levels of inflation."

And it's not been that long since we were dealing with really unappetizing levels of inflation.

Not so long ago, in the post-COVID years, we had 11% inflation in the UK. That was a pretty painful experience, and the central banks are really not keen to repeat that experience.

So what can we look at to make us more comfortable that even if energy prices remain high for a period of time, that's not going to cause that sort of negative spiral where inflation leads to more inflation and higher wages and again, more inflation?

Well, we can look at a couple things. We can look at money supply.

And what we can see there is actually, money supply is not telling us that there's an inflation threat on the horizon.

And also what we can see is that although energy is obviously still very important as a factor impacting CPI, Consumer Price Index, it's actually been declining in terms of its importance as a weight in that calculation.

And so although higher energy costs will mechanically lead to moderately higher inflation, it's unlikely to lead to the sort of COVID levels of inflation.

So let's talk about labor markets.

Because when we're thinking about how higher energy prices and potentially higher inflation levels could impact labor markets, we're in a very different place now than we were in, say, those post-COVID, 2021, 2022 type years.

So we can see in many of the developed economies, although growth is still really quite good, we are experiencing a bit of a, well, what I've titled here, jobless recovery, meaning that we're actually seeing less job creation.

Now in the UK, we're seeing it in the form of rising unemployment, admittedly from a very, very low level, but still not very nice. Job creation is also quite low.

And in the US, there has been very much a focus on the fact that, yes, companies are reporting good results, but they're able to do it through higher levels of productivity, not necessarily leading to increasing in headcounts.

So in terms of the market reaction, we're looking at things like, typically, when you have some sort of geopolitical tension or a war, what tends to happen is that investors flock to safe assets. So there's this sort of flight to quality move.

And so normally you would have expected government bond markets to actually perform quite well in the face of a renewed outbreak of war in the Middle East, at least as the first reaction.

But interestingly, what we saw is that government bond markets didn't perform particularly well. And other assets, which would normally be a safe haven, also sold off.

So for example, I've highlighted gold on this chart where you can see it did drop quite dramatically at the announcement of the war. And that definitely had investors a bit puzzled. What happened to the safety first type investment move?

There was definitely some comments saying, "Okay, maybe the focus is really around inflation concerns."

But what we think was going on really is that the knee-jerk reaction of markets is just to take risk down and also to increase the liquidity of your portfolios.

So you sell liquid assets, safe assets, high-quality assets as a way of increasing the cash or liquidity buffer in portfolios.

And so, when we're looking at something like US Treasury yields, which is the pale green line on the right-hand chart, we can see, yes, Treasury yields went up, but break-even inflation, which is the market's pricing of the future expectations for inflation, barely moved.

So it really looked like it was a sort of scrabble for trying to get liquidity, just in case, actually, the situation in the Middle East got worse.