With geopolitical tensions rising and inflation concerns returning, bond markets are facing another major test. Rhys Davies, Manager of Invesco Bond Income Plus (BIPS), joins the Fund Calibre team to discuss why high yield bonds have remained surprisingly resilient, how spreads are behaving and whether markets are becoming too complacent about risk.
In the latest edition of Fund Calibre’s podcast, the conversation explores portfolio positioning in uncertain conditions, the importance of diversification and why shorter-duration bonds are helping manage volatility.
Why you should listen to the interview: This interview offers a timely insight into how bond investors are navigating inflation fears, geopolitical uncertainty and volatile markets. It explains the realities of high yield investing while highlighting where experienced managers are still finding attractive income opportunities despite an increasingly complex backdrop.
This interview was recorded on 7 May 2026. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
Markets may be too optimistic
“So when we see that kind of optimism in the market, I think it is important to just pause, reflect, and make sure that we are thinking about whether risks are being priced appropriately. And that’s a concern right now – that risks are not being priced appropriately.
“With equity markets, we’re all seeing investors looking through to a resolution where oil and goods start flowing again.
“High yield bond markets are a little harder for most people to observe, but we’re seeing the same thing there as well. Risk markets are still behaving relatively positively despite the geopolitical backdrop.
“So, with that in mind, the portfolio is more cautiously positioned and just treading carefully. We’re choosing bonds where we feel we are being paid enough yield for the risks that are out there.
“That doesn’t mean panicking or dramatically changing the portfolio every week, but it does mean being thoughtful about what risks are actually being priced into markets today.”
Why doing nothing can sometimes be the right decision
“The portfolio that we put together going back into late 2024 was already designed for a more uncertain backdrop.
“If you remember, after the big move in bond markets during 2022, there were some great opportunities to put yield back into the portfolio through 2023 and into 2024.
“But by the tail end of 2024 and into 2025, the focus became: are we really being paid enough yield now for an uncertain outlook and relatively weak growth?
“So the portfolio was already in a good position for these types of events. Certainly, when you have sell-offs, that can create opportunities to buy more.
“Last year, the opportunities were more attractive than this year because yields had moved further. But in these kinds of markets, which are so volatile and driven by headlines and tweets, sitting tight often makes sense.
“The great thing about credit is that we are still being paid income while we wait. Every day those companies are accruing coupons that they must pay us every quarter or half year.”
High Yield has changed dramatically
“We used to call high yield bonds ‘junk bonds’. We stopped calling them that many years ago, mainly because it doesn’t sound great, but also because it’s not very fair.
“You can have high yield bonds issued by very good quality companies where the chances of them actually defaulting are still relatively low.
“The quality of the high yield market, particularly in Europe, has improved significantly over the past 20 years.
“We now have much more BB-rated issuance, which sits at the higher quality end of the high yield market. I’ve seen those changes over my career.
“More recently, companies have also adapted to a very different interest rate environment. We all went through that huge shift in borrowing costs after years of extremely low rates.
“Companies have responded by refinancing earlier and managing their balance sheets more prudently. So I’m not especially concerned about the quality of the high yield market as a whole.
“It’s in a better place today than it has been for many years, although there will always be pockets of risk and individual companies facing their own issues.”
Are markets ignoring inflation?
“During March, we saw how the Iran conflict started to raise concerns over inflation and, naturally, central bank policy as well.
“In the UK, expectations shifted from interest rate cuts to discussions about possible rate hikes.
“I think we’re now back to a more neutral outlook, but the trajectory of inflation and interest rates is clearly being questioned again.
“Personally, I think it would be premature for the Bank of England to move towards interest rate increases, particularly given labour market conditions.
“Wage pressures were not especially strong before the conflict began. But before the conflict, inflation generally looked under control and bond market interest rates were expected to keep drifting lower.
“Now, the concern is that higher oil prices and supply disruptions could change that outlook.
“So the best way for us to manage that risk is by keeping the portfolio’s interest rate sensitivity relatively low.
“That means focusing on bonds with maturities inside four or five years. In an environment like this, that feels like the prudent thing to do.”
Remember: a high yield bond is still just a loan
“A high yield bond is still a bond, and a bond is a loan. It must be repaid by the company that issued it. Yes, there can be price volatility, but the beauty of a bond is that we know what the end result will be. It’s a contractual obligation.
“So a bond that may trade at a price of 90 today, we know we should still receive 100 at maturity, provided the company doesn’t fail on that obligation.
“That’s a very important distinction compared to equities. Even in high yield markets, bond volatility should generally be lower than equity volatility because of that contractual repayment structure.
“Within the portfolio, we manage those risks through detailed credit analysis and diversification. Typically, we hold bonds from between 100 and 150 different companies.
“We can also use other tools, such as credit default swaps, when we feel markets are underpricing risk.
“But ultimately, understanding the companies we lend to and maintaining broad diversification are the key building blocks that allow us to generate attractive income for investors.”
Conclusion: This interview provides a fascinating look at balancing caution with opportunity in today’s markets.
From inflation risks and geopolitical shocks to overlooked bond opportunities and portfolio diversification, the discussion highlights the importance of discipline and credit analysis in uncertain times.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
Main image: background, pawel-czerwinski-HKHwdinroSo-unsplash
