In our thoughts for 2026 publication, we offer an outlook for fixed income asset classes over the year ahead. We see two important factors underlying fixed income markets in 2026.
Firstly, we've seen a surge of inflows into money market funds over recent years as investors sought to take advantage of soaring cash rates. As interest rates decline and yield curve steepen, we anticipate a migration of investors from cash back into bond markets.
The second factor is that although we don't expect the global economy to fall into recession, we expect a period of sluggish growth ahead with the US economy growing in the 0% to 2% range. This is potentially a tricky environment for equities, as credit has historically performed well in periods of slower growth.
A conundrum for investment grade credit markets is that spreads have narrowed, but that the absolute level of yields remains high relative to recent history. Ultimately, we believe that yield trumps spreads for most investors and for active managers, yield is just the starting point for returns.
Global high yield is another asset class that we believe could perform well in a slower growth environment. A notable trend here has been the steady improvement in the quality of companies within the market. For example, the proportion of BB rate issuers in US high yield markets has risen from just 35% in 1999 to over 54% by September, 2025. Management teams are highly focused on executing well-defined growth plans, securing funding certainty, and insulating their operations for market volatility.
As high yield markets have de-risked, so default rates have also declined. Within bond markets we believe an active global approach is critical as it maximizes the number of opportunities.
One of the opportunities we've been exploring recently is how a US dollar based portfolio can purchase Japanese government bonds and hedge the currency exposure back into dollars. As the chart shows, this can provide a dollar yield in excess of US treasuries.
In 2026, we'll also be closely monitoring a rapidly growing asset class, which is broadly known as esoteric ABS. One of the interesting parts of this universe are asset-backed securities that fund AI infrastructure. Data centers, cloud platforms, cell towers and fiber optic cables are increasingly funded through debt issuance and issuers are often prepared to pay a yield premium over broader credit markets as they race to secure funding, and get the assets built.
Finally, one of the key trends bond managers will be contemplating in 2026 is how inflation will impact markets.
Inflation forecasts vary considerably across the major economies. In the US, UK, and Japan forecasts for inflation have been rising steadily over the past year, while in the Eurozone inflation forecasts have declined. This makes it clear why the ECB have been able to ease policy more quickly than other major central banks.
The Fed are now playing catch up and have started to ease policy once again. But looking back at recent history, shows just how unusual it is for rate cuts to happen when inflation is so elevated.
The question for 2026 will be whether labor market softness is sufficient to dampen inflation, and whether tariff pressures are just a transitory issue.
To read our paper in full download 'Thoughts of 2026' from our website.
