Rising geopolitical tensions may weaken dollar recycling as Gulf states deepen ties with Beijing, keeping base rates higher. This comes as private credit—now a key absorber of capital—shows growing stress. Higher funding costs, redemption limits, and valuation gaps in BDCs signal the credit cycle is turning. With inflows slowing and capital absorption weakening, the system is entering a late-cycle phase where credit expansion stalls and pricing begins shifting from models to market reality.
Wars are not deflationary, especially for the U.S., where high debt and deficit monetization create inflationary pressures. Bond rallies during crises are often knee-jerk reactions, not true signals. With heavy short-term issuance, repo stress, and structural deficits, markets may misread conditions. If conflict persists, risks shift toward inflation and potential instability in the U.S. bond market.