Fixed Income Outlook

Tom Parker, Chief Investment Officer of Systematic Fixed Income, and Jeffrey Rosenberg, Senior Portfolio Manager, see the bond market at an inflection point as Fed easing pulls down short‑term yields while longer rates remain elevated.

This steepening has restored the advantage of stepping out of cash and into bonds. Shorter maturities now offer attractive income and improved diversification, while stable growth, low defaults and widening dispersion create selective opportunities for alpha.

Higher real yields, stronger credit fundamentals and steady inflows are restoring Europe’s appeal for fixed income investors. James Turner, Head of Global Fixed Income in EMEA, outlines why European markets now offer a compelling source of income and diversification as global policy paths diverge.

Emerging markets debt enters 2026 on firmer footing, supported by improving fundamentals, healthier balance sheets and a more constructive macro backdrop. Real yields remain attractive, inflation is moderating and policy divergence is creating differentiated opportunities across countries and sectors. Michel Aubenas, Head of Emerging Market Debt, outlines why a stronger foundation and supportive cycle are enhancing emerging markets’ role as a source of income, diversification and selective return potential.

Diverging policy paths across Asia are transforming dispersion into a source of opportunity for fixed income investors. Elevated real yields, improving fundamentals and increasingly favorable correlations are reshaping the region’s role in global portfolios.

Navin Saigal, Head of Global Fixed Income for Asia Pacific, explains how differentiated cycles across Asia are helping fixed income evolve from a diversifier into a potential return driver.

Municipal bonds enter 2026 on solid footing, supported by durable demand, manageable supply and sound credit fundamentals. While tighter valuations and volatility call for greater discipline, income remains the primary return driver.

Pat Haskell, Head of the Municipal Bond Group, explains why selectivity, structure and issuer level analysis are increasingly important to generating attractive, tax-efficient income in the year ahead.

Michael Gates, Head of Model Portfolio Solutions, notes that bonds continue to play a vital role in multi asset portfolios, offering lower volatility than equities, yield and some diversification benefits. However, with credit spreads generationally tight in nearly every corner of the market, much of fixed income is overexposed to the primary driver of spread compression: economic risk.

Looking across the macro backdrop, recent positive surprises in manufacturing data, trade activity and productivity appear net neutral, if not deflationary, and reinforce the trend of softening core inflation. Shelter-related inflation continues to moderate toward pre-pandemic levels.

As the Fed attempts to counter or respond to increasingly inelastic headline jobs growth, policy dynamics may shift later this year in a way that creates a downward tailwind for U.S. Treasury yields. Yet even with that positive twist, yield curve bets feel tough to stomach as the margin for error shrinks with each successive rate cut.

The biggest takeaway lies in credit markets, where too much perfection may be priced, and investors may want to consider the uncapped economic exposure provided by equities rather than picking up pennies for the same risks with credit. Accordingly, the outlook emphasizes diversification and risk mitigation from government bonds or out-of-benchmark commodities.