Key take-aways
- In 2026, favourable yields and easing by the US Federal Reserve may support resilient fixed income investing.
- A barbell strategy (short-term high-yield bonds and longer-duration quality bonds) could optimise risk-adjusted returns.
- Strong credit fundamentals warrant selective high-yield exposure, focused on short-dated issuers.
- Emerging market corporate bonds and dividend-paying equities can potentially add diversification and income with controlled risk.
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.
At a glance: What is fixed income?
Fixed income is a type of investment that provides a return in the form of regular, fixed or floated interest payments and the eventual return of the principal at maturity.
Common examples of fixed income securities include:
• Government bonds: These are bonds issued by national governments (e.g. US Treasuries, German Bunds) to finance public spending.
• Corporate bonds: These are bonds issued by companies to raise capital; they usually offer higher yields than government bonds but carry credit risk.
• Municipal bonds: These are bonds issued by local governments or their agencies, often tax-exempt in certain jurisdictions.
• Certificates of deposit (CDs): These are time deposits offered by banks with fixed terms and interest rates.
• Floating-rate notes and inflation-linked bonds: These are variants designed to protect against interest rate changes or inflation.
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.
Fixed income at a glance
Who should invest in fixed income?
Fixed income is a core building block of any multi-asset class portfolio. Investors aiming to diversify away from equity market volatility could benefit from allocating to fixed income. These instruments have historically shown a lower correlation with equities and exhibit less volatility, helping to reduce overall portfolio risk. Fixed income investments are ideally suited for those seeking stable, predictable income and capital preservation, particularly those approaching retirement or already retired who rely on regular cash flows.
What are the key features of fixed income instruments?
- Coupon rate: This is the interest rate paid to the investor, usually expressed as a percentage of the face value.
- Maturity date: This is the date on which the issuer repays the principal amount borrowed.
- Credit quality: This is a measure, expressed as a rating, of an issuer’s financial solvency. Higher-rated bonds imply lower expected default risk.
- Yield: This is the effective return an investor earns, which can differ from the coupon rate due to market price fluctuations.
What are the risks of fixed income?
Fixed income investments are exposed to several key risks that can affect both capital preservation and income generation. They include:
- market risk
- credit risk
- currency risk
- political and economic risks
- product-specific risks
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.