Over the weekend, I was excited to see that Christopher Nolan’s The Odyssey had finally arrived at my local cinema. I haven’t watched it yet – no spoilers here, I promise! Judging from early previews, the movie revisits Homer’s epic tale of Odysseus, the king of Ithaca, as he attempts to sail back home after the fall of Troy. In a scene from the movie trailer, Odysseus orders his men to “put up sails to catch the southerly winds,” when a voyage westward would have been the more direct route. One of his commanders cautions him, “Are you sure? This could be risky.” Thus begins the legendary Homeric journey into the perilous, uncharted waters of the Mediterranean – confronting monsters, sirens, the land of the dead and the narrow strait between Scylla and Charybdis.

Bond investors may feel they are on a similar voyage this year. Yields have charted a jagged course – falling on cooling inflation, rising with oil shocks and geopolitical tensions and whipsawing on every new data print.

From a soft landing to rough seas

The bond markets started the year with an optimistic outlook. With an economic soft-landing consensus view, the Fed looked poised to cut rates twice as the effects of US President Trump’s 2025 tariffs faded into the background. However, the narrative shifted abruptly in late February with the conflict in the Middle East and the subsequent closing of the Strait of Hormuz, effectively choking off about 20% of global oil supply and sending energy prices soaring. In response, markets flipped from pricing two Fed rate cuts at the start of the year to nearly two hikes by year-end 2026.

I would like to think someone in the White House Situation Room also cautioned the commander-in-chief against the potential risks of the Iran conflict, but the course was set – and here we are, with the US 30-year government bond yield above 5% for its longest stretch since the 2000s. Moreover, the US fiscal deficit – worsened by rising defence outlays – continues to widen as far as the eye can see. Thus, we expect the ultra‑long end of the Treasury curve to carry a wider term premium for some time.

That said, our base case is that the Fed will keep its policy rate on hold through year-end 2026. Both the US and Iran appear fatigued by the ongoing kinetic conflict, and oil prices are moderating, which should produce a more benign July inflation print – though likely still hotter than June.

Safe harbours in fixed income

To capitalise on current market conditions, income-focused investors should consider selectively locking in yields that sit at compelling levels in certain sectors:

10-year Treasury Inflation-protected Securities (TIPS): Real yields around 2.4% above inflation offer a compelling hedge and durable income.

European bank subordinated debt: Yield-to-call near 7%, with many national champions remaining well-capitalised.

US High-yield bonds: All-in yields of around 7.5%, while avoiding much of the huge bond issuance from hyperscalers. Hyperscalers typically issue investment-grade (IG) corporate bonds, where we’re seeing early signs of indigestion in the long-duration IG market. As a result, IG bond yield spreads are starting to widen.

All told, today’s shifting yields can make fixed income feel like an unnavigable ‘odyssey’, but with careful navigation – avoiding certain sectors, selectively adding high-income exposure and hedging with TIPS – investors can prudently lock in attractive yields amid uncertainty. In the end, Odysseus does make it home to a good outcome. With the right map, bond investors can, too.