Markets brace for rising global risks

Markets react to risk before all facts are clear. When tensions rise in the Middle East, investors adjust prices based on potential disruptions, not optimism. The recent conflict has reignited worries about energy costs, inflation, and whether central banks will follow through on their commitments. For those investing in structured credit, the key insight comes from the last major rate increase.

Lessons from the 2022-2023 rate surge

The 2022-2023 period tested financial assets. Rapid monetary tightening met high inflation and concerns about household debt. Consumer asset-backed securities, including auto loans and credit card receivables, performed better than many anticipated. This strength came from healthier household finances, stricter lending rules, and borrowers focusing on essential payments over spending.

Defaults increased but remained below expectations. When rate hikes paused, conditions improved. Mortgage and auto loan pools remained stable without major losses. Evidence indicates that if future rate shocks are smaller or more gradual, the effects may be less severe—assuming wages keep pace.

Floating rate credit performed well during volatility

A clear pattern appeared during that time: floating rate assets fared better than fixed rate ones. As interest rates rose, floating rate credit adjusted its payments upward, reducing losses and maintaining income. Price swings were less dramatic than with traditional corporate bonds.

Income came from steady returns rather than price increases. This reduced the need to time the market or rely on narrowing spreads. High-quality asset-backed securities provided more consistent results, with less connection to government bonds and fixed rate credit. In both euro and sterling markets, senior ABS strategies showed stronger overall returns and smaller declines than similarly rated short-term corporate bonds.

The stability wasn’t accidental. As loans are paid off, risk decreases. Even during the 2022-2023 turbulence, rating upgrades exceeded downgrades—an unusual outcome in uncertain conditions.

The recent rate shock’s lessons apply now because geopolitical tensions rarely end neatly. Markets respond to uncertainty by reassessing fundamentals like balance sheet strength, structural protections, and income reliability. With inflation risks still present and central bank credibility in question, assets that adjust with rates—and are backed by steady consumers—may provide a more secure option.

Investors shouldn’t focus on predicting the next crisis. Structure matters more. Clear cash flow, disciplined valuation, and assets that adapt to changing conditions protect capital better than forecasting. That approach worked last time.

It could work again.