By François Rimeu, Senior Strategist, Crédit Mutuel Asset Management
Crédit Mutuel Asset Management is an asset management company of Groupe La Française, the holding company of the asset management business line of Credit Mutuel Alliance Fédérale.
The situation surrounding the Strait of Hormuz remains difficult to assess. While oil markets appear to have found a temporary equilibrium, the sustainability of that balance remains uncertain. Yet oil is only part of the equation: fertilizers, aluminum, urea and liquefied natural gas (LNG) are also being affected by a global supply shock that is reigniting inflationary pressures. For central banks, the risk of inflation expectations becoming unanchored is complicating the monetary policy outlook and fueling renewed volatility across bond markets.
Following the inflationary shocks triggered first by COVID-19 and then by the war between Russia and Ukraine, tensions in the Middle East are now creating a fresh wave of inflationary pressure. The latest data show euro area inflation at 3.2% as of end-May 2026 (Source: EU Harmonised Index of Consumer Prices), a figure that could move higher in the coming months should the conflict persist. The picture is similar in the United States, where inflation reached 4.2% year-on-year as of end-May 2026 (Source: CPI). Here too, risks remain skewed to the upside.
For central banks, this raises the prospect of inflation expectations becoming unanchored after successive economic shocks, forcing policymakers to reassess their monetary outlook. Most recently, the European Central Bank, which had anticipated a broadly stable policy stance as recently as late February, raised interest rates and may do so once or twice again before year-end, all else being equal. A similar reversal is taking place at the Federal Reserve. The US central bank had previously signaled potential rate cuts, but these no longer appear to be on the agenda.
In turn, this environment is fueling greater uncertainty across fixed income markets and contributing to a renewed rise in volatility. Thirty-day volatility on the US 10-year Treasury has risen from around 3.5% prior to the Strait of Hormuz shock to more than 5% (Bloomberg, as at June 12). The move has been even more pronounced in the euro area, where 30-day volatility on French nine-year government bonds has increased from around 3% to more than 8% (Bloomberg, as at June 12).
Will volatility remain elevated? That is far from certain. The Strait could reopen quickly and the shock may dissipate. Nevertheless, it is increasingly clear that since 2020, investors are operating in a world where inflation has once again become a structural risk, one that is likely to persist.
Against this backdrop, Floating Rate Notes (FRNs) appear well suited to the current environment:
- FRN coupons reset periodically, typically on a quarterly basis, allowing them to adjust to changes in monetary policy and higher interest rates;
- Their sensitivity to interest rate movements remains very limited, resulting in minimal duration risk;
- Current rate levels provide historically attractive yields.
In today’s environment, Floating Rate Notes may increasingly look less like an alternative and more like an obvious choice.
