After weeks of pressuring Tehran for a new nuclear deal while simultaneously amassing American firepower in the region, the US on the morning of February 28 (local time) launched Operation Epic Fury in conjunction with Israel, targeting Iranian leadership and military targets across the country. In response, Iran has attacked US military bases throughout the Gulf as well as the region’s economic and energy hubs.

The reaction of financial markets to the outbreak of war has been fairly measured and predictable, with oil and gas prices moving higher alongside perceived safe-haven assets like gold and the US dollar. Treasury yields and inflation break-evens rose, suggesting the market is more concerned about the inflationary impact of the attack on Iran than the potential hit to growth. While global equities markets opened sharply lower on Monday morning, many traced back the worst of their declines; the S&P 500 Index, for example, was flattish by noon eastern. Oil majors and defense and aerospace names largely advanced, while airlines and cruise operators were among the industries most negatively impacted.¹

Shipping traffic through the Strait of Hormuz has already shuddered to a halt over the past few days, as insurers will not underwrite the journey given the increased risk. A prolonged disruption to traffic could provoke a sharper oil price increase with serious implications for global economic activity, particularly in China and the other Asian markets to which the bulk of the oil traveling through the strait is destined.³ OPEC+ agreed to increase output by 206,000 barrels per day starting in April, but many of the cartel’s key production centers—Saudi Arabia being one notable exception—are largely dependent on the Strait of Hormuz for export, suggesting that the additional supply could bring little relief in the case of extended shipping disruptions.

Though the potential duration of active hostilities between the US/Israel and Iran remains unclear at this point, normalcy appears unlikely in short order. The leadership vacuum created by the killing of Iran’s Supreme Leader Ayatollah Ali Khamenei widens the range of potential outcomes to the conflict and the likelihood of ongoing volatility in markets. Geopolitics were among the potential fat-tail investment risks on our radar entering 2026, and we believe the recent escalation of tensions in the Middle East highlights the importance of resilient portfolio construction.

As the K-shaped economy continues to develop, with activity increasingly dependent upon upper-income households, we remain cautious on structured credit exposure to lower-credit consumers.¹

Auto loan and lease delinquencies remain elevated relative to the past 20 years, with prime auto delinquencies at the 84^th percentile and subprime at the 99^th percentile. That said, these levels have persisted for several years, and more recent securitizations, including some deep subprime vintages, have generally exhibited stable to improving performance. Importantly, prior deals have largely maintained structural integrity, with limited bond losses or downgrades to date.

Delinquency trends are likely to remain pressured into early 2026. Financial conditions remain tight, with policy rates still near 15-year highs.²

While above-average tax returns stemming from the 2025 tax-and-spending bill could help stressed consumers catch up on loan payments, consumer confidence is the lowest it’s been in 10 years amid persistently above-target inflation and signs of softening employment. And that was before recent, large high-profile layoff announcements from Amazon (16,000 jobs) and UPS (30,000 jobs).³

As overall credit-market returns ratchet down along with declining base rates, spreads can become the dominant component of yield, determining and driving the stability of returns for investors. With tight spreads, all-in yield compression and heightened risks—idiosyncratic, macroeconomic and geopolitical—caution across asset classes remains our new conviction.