Investing.com -- Bonds are regaining their role as a hedge against risk as investors shift focus from inflation concerns to slowing growth amid escalating Middle East tensions, according to Citadel Securities.

Nohshad Shah, head of EMEA fixed-income sales at Citadel Securities, wrote in a client note that cross-asset moves indicate a potential shift is approaching.

Shah said longer-dated fixed income should begin performing as a hedge to risk assets as growth concerns move to the forefront.

A prolonged war could create demand destruction through either persistently high energy prices or aggressive central bank tightening to contain rising inflation expectations, Shah noted.

Shah described the situation as a "classic escalation trap," with little sign of a near-term resolution. Each side intensifies action hoping to force a retreat, only to provoke further retaliation, he said.

"Risk markets continue to underestimate the peril of a long conflict without a clear endgame and the impact of a sustained energy price shock," Shah wrote.

Between the start of the war late last month and mid-last week, shifts in interest rates and the dollar accounted for about 56% of the tightening in financial conditions, with risk assets like stocks contributing the remaining 44%. That dynamic has since reversed, with risk assets driving roughly 61% of the tightening, suggesting a transition from pricing an inflation shock to pricing growth risks, Shah said.

Bonds declined this month across global markets as the conflict in Iran triggered major disruptions to oil supply. Some of Wall Street's largest bond managers are increasingly betting yields will decline, expecting a prolonged war to drag down growth.