Market volatility rises amid US-Iran war, is it time to invest in bonds?

bond

• Middle East tensions spike stock volatility and oil prices
• Experts recommend investing in high-quality bonds for stability
• AAA-rated bonds maturing in 2-3 years offer attractive yields

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Rising geopolitical tensions in the Middle East, particularly the ongoing Israel–Iran conflict, have injected significant volatility into global financial markets. Stock indices have slipped sharply, while crude oil prices have surged past $115 a barrel amid concerns of supply disruptions and prolonged instability.

For investors, such periods of uncertainty often prompt a reassessment of portfolio risk and allocation. While equities may experience sharp swings, bonds can offer relatively stable returns and predictable income, making them a valuable tool for balancing portfolios. Experts suggest that deploying a portion of idle cash into high-quality bonds could help navigate market turbulence while maintaining long-term financial goals.

What are bonds?

A bond is a financial instrument used by governments and corporations to raise funds by borrowing money from investors. When you invest in a bond, you essentially lend money to the issuer for a fixed period at a predetermined interest rate, known as the coupon rate.

In return, the issuer pays you regular interest payments, calculated as a percentage of the bond’s face value. Once the bond reaches its maturity date, the issuer repays the original principal amount to the investor.

Investors can also earn capital gains if the market price of the bond rises after purchase. However, it is important to note that while the coupon rate remains fixed, the market price of a bond can fluctuate due to changes in interest rates and market conditions, which may lead to gains or losses if the bond is sold before maturity.

Is it a good time to invest in bonds?

For investors who want some balance in their portfolio, this can be a good time to look at bonds.

“Current term structure of bond yields provides investors with an attractive opportunity, given that credit spreads are attractive up to 3-year tenor due to cyclical and structural factors. Investors with investment horizon of at least one year may look to invest/add further in AAA-rated bonds maturing in 2 to 3 years amid 7-7.15 percent yields, above-average credit spreads and stable rate environment,” said Dhawal Dalal, President & CIO - Fixed Income, Edelweiss MF.

“Whenever there is global uncertainty like the current Israel–Iran conflict, stock markets tend to become volatile, and many investors start looking for stability. Bonds can play that role because they offer predictable returns and are generally less volatile than equities,” said Ajinkya Kulkarni, CEO, Wint Wealth.

“For those holding idle cash, deploying a portion into bonds in the short run could be a prudent way to bring balance to the portfolio while navigating uncertainty,” said Vineet Agrawal, Co-founder, Jiraaf (Bond investment platform).

Should people prefer government bonds or corporate bonds at this stage?

Government bonds and corporate bonds serve different but equally important roles within a portfolio. “Government bonds can provide a layer of safety and help anchor allocations during uncertain periods, while high-quality corporate bonds can enhance overall return potential through better yields. In our view, the more thoughtful approach is to build a diversified bond allocation that combines both. This allows investors to benefit from quality and balance on one side, while also capturing stronger accrual opportunities on the other,” Agrawal said.

What should current investors do?

Investors having exposure to bonds already need to check the duration of their fixed-income portfolio and relative credit risk. “Since policy rates are likely to remain stable for the next 12-18 months, it probably makes sense to ensure that the average duration of their fixed income investments is not significantly higher than 2-3 years. This may protect their portfolio from undue volatility when the rate cycle turns,” Dalal said.

Expert suggest having exposure to predominantly higher-rated bonds (AAA/AA+) may also provide investors with a higher level of comfort in the form of relatively lower price volatility and better secondary market liquidity.

Overall, while the geopolitical crisis has increased market uncertainty, it has also revived interest in bonds as a relatively safer investment option. For investors seeking stability and predictable returns amid market turbulence, fixed-income assets could play an important role in balancing portfolios.

(Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.)