Q: What will fixed income investors face in 2026?

The outlook for fixed income markets in 2026 is shaped by a combination of stabilising macroeconomic conditions, a continued easing cycle by the US Federal Reserve, and a strategic shift for investors towards managing volatility while preserving income. 

Major developed market yield curves are expected to move sideways, maintaining a sufficiently steep slope that supports a moderate duration overweight. Moreover, this environment favours a barbell strategy that combines short-term credit risk allocation with longer-duration exposure to high-quality bonds.

Q: How will rates and durations be impacted in 2026?

Rate volatility has declined significantly as the Federal Reserve continues its easing cycle. The US Treasury’s dynamic funding strategy – emphasising short-term issuance – helps manage supply pressures, at least for the time being, despite a sizeable net borrowing need. As such, while the long-term fiscal path remains trickier, it is not an immediate concern. The term premium is rising slowly, making it a secular rather than a cyclical issue. 

In summary: Given these dynamics, a slight overweight in duration remains appropriate, especially as real yields remain attractively high and rangebound for now, in our view.

Q: What about the role of credit, and how will the segment be affected in 2026? 

Overall, the fundamentals of corporate bonds ('credit') are solid, supported by stable interest coverage ratios and restrained leverage. The slowing US economy is not collapsing, and the Federal Reserve’s easing stance is expected to help default rates stay low or even decrease further. However, market sensitivity to negative news has increased, particularly given the tight spread valuations. This calls for a refined credit strategy that avoids excessive spread duration in riskier segments.

In summary: High-yield exposure should be concentrated in short-dated bonds to mitigate volatility, while longer-duration positions should be filled with high-quality investment-grade bonds. This approach reduces sensitivity to spread changes and maintains attractive carry. 

Emerging market corporate debt offers a well-diversified universe with low default rates and alternative risk premiums. These assets are less sensitive to current global pain points and provide country-specific risk exposure.

Q: What strategy can fixed income investors consider for 2026? 

One of the most commonly asked questions from clients is: Where can I find reliable income without taking on excessive risk in today’s environment? To build resilience and capture yield, our Market Outlook 2026 outlines a barbell strategy that combines short-term credit risk allocation with longer-duration exposure to high-quality bonds.

How to implement the barbell approach in fixed income

• Focus on short-dated high-yield corporate bonds. 
• Focus on slightly longer-duration, high-quality, investment-grade bonds. 
• Consider select exposure to emerging market hard-currency corporate bonds for additional diversification and carry with low default risk.

Combining these three building blocks creates a compelling and diversified fixed income portfolio for income-seeking investors who want to avoid excessive risk. As an addition to those fixed income segments, investors may also consider high-dividend/low-volatility stocks for further diversification and to generate additional income. Notably, high-quality dividend stocks can be found across a wide range of sectors and regions, offering investors globally diversified exposure via this investment style.

Curious about the bigger picture? To discover our cross-asset and macroeconomic views for the year ahead, including key themes and top calls across markets, download the complete Market Outlook 2026 brochure below.