Executive Summary

• Geopolitical Escalations in the Middle East: On Saturday morning, US and Israeli defense forces executed substantial joint military actions in Iran, including targeted strikes that killed Ayatollah Ali Khamenei and key Iranian military leaders. In response, the IRGC retaliated with its own strikes against US military assets in countries across the Persian Gulf and strikes against Israel, and reportedly attacked three US and UK-owned tankers in transit to the Strait of Hormuz. After Saturday’s strike, expectations for risk off amid upward pressure on oil prices materialized. As futures trading opened in Asia, the largest macro market reaction was clearly in oil with Brent up 10% since Thursday’s close as of this writing. Market reactions elsewhere were more muted with 10y futures up nominally and only 0.5% since Thursday’s close. US equity futures are down, continuing the move from last week, while spot gold is trading up with many viewing any scenario as a positive for gold given its safe-haven and inflation-hedge characteristics.

• In the near-term we maintain our defensive recommendations, preferring duration risk to credit risk as we see any energy commodity-driven inflation as likely more growth destructive than truly inflationary. While initial market reactions have been fairly tempered, we expect a subdued new issue calendar amid broader volatility and expect continued pressure on IG and HY spreads. As we highlighted in our 2026 US IG & Leveraged Finance Outlook, we reiterate preference for fixed over floating rate asset classes and maintain a constructive view for US IG total return investors amid our call for falling UST yields.