Markets are miscalculating the longer-term impact of energy shocks and their knock-on effects on inflation, says James Athey, macro investor and fixed income fund manager at Marlborough. Speaking to Trader TV, Athey argues that while risk assets showed signs of over-optimism following the announcement of a temporary US–Iran ceasefire, bond yields, at times, overreacted to persistent inflation concerns.
In this episode, the fund manager discusses navigating markets by filtering out short-term noise. He also examines relative resilience across emerging markets versus developed markets, and shares his overall risk outlook for the remainder of Q2 2026.
Interview
Josephine Gallagher – Let’s start off with some context, what are some of the key takeaways from how markets have been reacting to last week’s announcement of a temporary so-called ceasefire?
James Athey – Yeah, using the phrase so-called is pretty relevant here. I mean, geopolitics is always hard we know that it’s very difficult to forecast outcomes, let alone how exactly those outcomes will play out for markets. It’s clear that a ceasefire is great news, and just going into the last few days, it really didn’t feel like we were close at all. All of the rhetoric from Iran’s side certainly was strongly suggesting that they were not willing to negotiate, let alone were close to a ceasefire. It was increasingly clear that the President was looking for an off-ramp, but I think investors are very skeptical, so it’s come somewhat out of the blue. It’s definitely good news from a sentiment perspective. And of course, that means markets have reacted accordingly. Risk assets have rallied. Bond yields have fallen, and certainly, the oil price has fallen. I guess the big proximate question now is, to what extent this ceasefire holds, and already the significant evidence that we’re struggling to maintain peace, but that uncertainty is going to swirl for us, though realistically, the more important things to consider are just how much and how long the disruptions to key commodities and energy markets are going to persist for.
Josephine Gallagher – And so how do you adjust your bond portfolio and your position sizing in times where there is elevated entry volatility, especially against the backdrop where there are rapidly changing headlines and a very uncertain pathway when it comes to interest rates?
James Athey – Yeah. I mean, the answer to that question will definitely depend on who you’re asking. Just to make it simple, let’s assume that there are two groups that you could be asking here. The first will call traders. I’m going to include a lot of hedge fund managers in there, because they have very similar approaches. These people really cannot afford to be on the wrong side of moves, even over a very short period of time. That means that they have to keep their risk on a very tight leash. So the initial response to a shock like this is certainly to remove any positions which are the wrong way, anything which is going against you has to come off very quickly. Beyond that, the way in which a lot of them measure the amount of risk that they’re running is something akin to a VAR, a value at risk model, basically speaking, that means when volatility goes up, the risk in their portfolio goes up, and that’s also going to result in them reducing positions across the board, what we would call de-grossing. So those investors will be very quick to respond. They will not hang around, they will not hesitate, and they will reduce the size of all positions, and they will probably stop out of anything which is going against them. We put ourselves in that latter group, which is investors. We can afford to warehouse a certain amount of volatility, and we’re seeking the signal rather than responding to the noise. Of course, that’s difficult to do when things are highly uncertain, but that’s still what we would like to try and do, is to look through this short-term period and try and assess how the new information is going to affect that medium-term view, and then respond accordingly. Now that may still involve reducing the size of some positions. Again, volatility is increased, and we have to be cognizant of that. But where possible, you know, we want to still be seeing these kind of market dislocations as an opportunity. If we can add to or get into positions that we liked anyway, at more attractive levels, then that’s what we would seek to do to take advantage of what should still be a fleeting or temporary disruption relating to the war in the Middle East.
Josephine Gallagher – On that note, though, are you seeing any signs of market complacency in risk to longer-term inflation and higher energy prices?
James Athey – Yeah, I’m going to give a very bond investor-type answer here. Yes, we do see signs of complacency, but we would say they’re mostly within risk markets, I mean, particularly equity markets, and again, particularly given the size of moves we’ve seen post the ceasefire headlines. Ultimately, the war being over is not necessarily the end of this period. The disruption to oil markets, particularly, but also to gas markets, to nitrogen markets, to helium markets, and urea fertilizer in general, these will not be fleeting. There has been a significant supply disruption, and even production disruption. That will have a lasting effect, and most of that effect is likely to be negative for economies. So to see equities very quickly back towards all-time highs at a time where there are other concerns beyond what’s going on in the Middle East, feel somewhat complacent to us. Actually, that complacency is a little bit reflected in just how downward sloping the Oil Futures Curve is as well. On the flip side, bonds have probably overreacted. It’s very easy to say higher oil prices will mean higher inflation, and that is definitely the near-term result, but the way in which front-end yields have repriced, suggesting really significant interest rate hikes from a number of central banks, it’s probably too informed by what happened in 2022, and in our opinion, that’s an inappropriate historical analog. The economic situation that existed on the eve of that energy shock, when Russia invaded Ukraine, was already vastly different to what we see today. You know, much stronger economic growth, much higher inflation going in, and a big fall in unemployment and a mismatch, a big mismatch between supply and demand within the economy and within labour markets. That obviously led to really self-fulfilling inflation spiral while central banks had policy at the zero lower bound and was still doing QE (quantitative easing) today, rates are already higher, economies are already weaker, and central banks have policy neutral or slightly tight. So we’re not expecting inflation to become such a big problem, and we think central banks hiking aggressively would be a mistake. So we think bond yields have gone too far, and we’ve been leaning into that.
Josephine Gallagher – One of the big surprises has been the resiliency across emerging markets. Characterize what you’re seeing across EM flow and liquidity?
James Athey – Yeah, EM (emerging markets) been a really popular trade for the last year or more. We’ve been big fans of it through 2025 as I keep saying publicly, if I want policy orthodoxy, I go to EM, not DM (developed markets). Obviously, that’s a complete flip of the script that we’d have been used to for many, many years, where one of the characteristics really that defined an emerging market was lack of institutional credibility, and, you know, a lack of really policy orthodoxy at times. That’s been flipped on its head. We’ve got lots of fiscal incontinence across developed world. The response to Covid in EM was much more orthodox, much more rapid, and much more robust. And those tailwinds of policy credibility, combined with the potential for monetary easing having done the hard work early post-Covid, that allows EM central banks to be easing policy at this stage, and that’s also been acting as a tailwind for equities. So it was a popular trade lots of investors were involved. And again, of course, when you get this shock at the start of March, we have seen positions being unwound, assets leaving the asset class. But I would say, actually, considering traditionally, we would always expect emerging markets to be more volatile, but that reaction has been relatively contained, and we’ve seen just in the last week that, again, following positive news around the ceasefire, the response from EM has been pretty rapid and pretty aggressive. We’ve seen yields coming down handily across high BETA EM markets, and we’ve seen equities sort of pushing back towards the highs again. So I think actually, considering how big a shock this has been, I think EM has handled it very well. It certainly helps that you have energy producers within EM that are seen as, to some degree, a bit of a haven and a harbour during a sort of commodity and energy price shock, as we’ve seen.
Josephine Gallagher – And finally, to wrap things up, James, what is your overall risk outlook for the rest of this quarter?
James Athey – Yeah, so we think, essentially, the easy money has been made now from the relief trade; we’ve had some positive headlines. You know, both sides seem more open to a negotiation than they did, but we’re still far from having certainty about how this plays out, and certainly it does not look like the Strait of Hormuz is yet open, and it’s hard to really specifically envisage how that’s going to work. Iran will be reluctant to give up control. So we’re not out of the woods yet, even with respect to the military conflagration, and that’s before we even get into the long lasting effect of all this disruption for commodity and energy markets in particular. So equities back towards the all time highs feel like they’ve probably priced more than enough good news. Now it’s going to be about specifics, how quickly we can get back to normality, and just how much lasting damage there has been to economies, to inflation and how central banks respond. So I’d be a bit nervous if I had a huge long equity position, whereas bond yields, we think, are offering you a bit of comfort, a bit of a cushion, versus the likely outcomes. And so that’s where we’ve been deploying capital. So for me, this is about how cheap defensiveness is relative to cyclicality. In an end of the cycle phase when uncertainty is high.
