Bond markets whipsawed on uncertainty from Iran war negotiations as the conflict entered its fourth week, driving up government yields due to inflationary concerns from rapidly rising oil prices. Yields in both Canada and the US have pushed higher over the last month. The most impacted area has been the two- to five-year range as investors price in inflationary pressure and the risk of potential rate hikes. Since the war began, investors have been positioning themselves into shorter-duration exchange-traded funds (ETFs) that are less sensitive to the volatile rate environment, while straying away from longer-duration and select non-investment grade higher-yield funds. 

Although all global central banks have experienced some degree of energy inflation and rate hike pressures from the war, there is significant concern in the UK. Battling existing high-debt levels, weakened productivity, and economic growth challenges, this environment catalyzed expectations for multiple rate hikes by the BoE this year—coming off of expectations for a possible rate cut just a week prior. The UK’s seasonally adjusted input price data posted the fastest monthly acceleration since October 1992, driven by rising fuel, transportation, and energy prices. Consequently, the five-year UK government bond (Gilts) yield has surged over 0.85% since the beginning of March. Monitoring government yields amidst the war is important for investors, as they provide real-time insights into ever-changing market dynamics around future inflation expectations and monetary policy—the latter already showing up in the cautious tones from the European Central Bank, Bank of Canada, US Federal Reserve and Bank of England. 

Private credit market woes persisted, as Apollo Global Management and Ares Management saw outsized investor redemption requests (over 11%) on their private credit funds—leading both asset managers to cap withdrawals at 5% in an effort to uphold fund investment objectives and fiduciary obligations to long-term investors. Rising redemption requests suggest investors are growing nervous about AI-disrupted software exposure, lending practices, and infrequent liquidity/valuation of these funds. Private credit funds, while paying investors a premium for this illiquidity, are often misunderstood due to their restrictive capital lock-up periods and strict redemption guidelines. Third-party credit rating agency Moody’s downgraded KKR Capital Corp (which manages a private credit fund with Future Standard) to non-investment grade/high-yield “junk” status. Moody’s cited asset quality deterioration, eroding profitability, and higher leverage relative to peers as rationales for the downgrade. This ongoing stress follows a trend seen in earlier weeks, where private credit peers like Blue Owl, Blackstone, and Cliffwater faced significant investor redemption requests that required them to implement withdrawal caps, and in some cases, sell existing assets at market discounts.

There were a few notable North American new bond issuances last week. Apollo Global priced a USD$750 million deal for a 10-year maturity bond, priced to yield 5.70%, with proceeds intended for general corporate purposes and to repurchase, repay, and redeem existing debt. Entertainment/video game giant, Electronic Arts, issued a USD$15 billion bond sale to help fund the record USD$55 billion leveraged buyout of Electronic Arts by private equity firms Silver Lake Management, Saudi Arabia’s public investment fund, and Affinity Partners. Lastly, Bell Canada priced a CAD$750 million, seven-year maturity bond expected to yield around 1.15% above the closest government benchmark.