Outlook 2026: Navigate new pathways – fixed income strategy

Diversified and active for resilience

“Developed economies are expected to grow close to their trend pace, while emerging markets maintain a clear growth premium, led by India and parts of South East Asia. This divergence creates opportunities for selective duration and credit positioning across regions.“ Jenny Zeng, CIO Fixed Income

Global growth in 2026 should remain resilient, underpinned by largely pro-growth policy settings in the major economies. Central banks in developed markets are likely to have normalised policy rates towards neutral levels, following the aggressive tightening cycle of prior years. Fiscal policy continues to lean towards an accommodative stance, with governments prioritising infrastructure and strategic investment to counter lingering trade and geopolitical uncertainties. We think inflation will continue to be asynchronous – likely to rise in the US, remain moderate in the euro area, and be subdued in Asia and major emerging market countries.

This growth and inflation combination underpins an overall benign environment for fixed income. We expect some divergence in growth and inflation dynamics, as well as policy trajectories, which will create opportunities for selective duration and credit positioning in active portfolios.

Nonetheless, volatility is likely to rise amid tight valuations. We think institutional resilience and policy flexibility will continue to be tested – as will the global economy’s ability to adapt to a more fragmented world. This calls for vigilance, not indulgence, quality over imbalances, active over passive, and liquid over illiquid.

Policy support counters growth pressure

Growth remains under pressure, but targeted fiscal and monetary policy and investments in technology provide support. Developed economies are expected to grow close to their trend pace, while emerging markets maintain a clear growth premium, led by India and parts of South East Asia. This divergence creates opportunities for selective duration and credit positioning across regions.

In monetary policy, we also see divergence, especially between developed and emerging markets.

• Developed markets: Policy rates are expected to fall further, with the US Federal Reserve cutting towards 3% and the European Central Bank below 2%. We think the Bank of England may cut more than currently priced against a very tight fiscal stance. In Japan, meanwhile, pressure to normalise policy continues to grow given heightened inflation risks.
• Emerging markets: Despite the disinflation momentum slowing, several central banks retain room for more easing, given positive real rates. A number of countries, including Brazil, Mexico, India and South Africa, are positioned for incremental cuts, which should support the performance of local currency debt.

Tight credit spreads call for vigilance

In credit, spreads remain historically tight, reflecting resilient fundamentals and strong technicals amid increasing investor demand. However, we see cracks emerging given late-cycle dynamics, and these warrant caution. There are signs of stress in sectors that are highly interest-rate sensitive, with lower-quality issuers that are more aggressive, more stretched and (potentially) fraudulent starting to fail.

At this point, we believe the systemic risk is small. Banks’ exposure to these kinds of sectors – in terms of total loans and capital – seems manageable and across the banking system we see broadly solid fundamentals. In general, public credit remains in good shape. While fundamentals are moderating from high levels, and dispersion is rising across sectors, leverage is lower than in prior cycles, interest coverage is healthier and the high-yield index quality has improved as weaker issuers are taken out (partially by private markets).

Nonetheless, valuations leave little cushion against macro shocks. This is an environment that calls for vigilance, but we think it is too early to give up on carry.

Active, diversified, risk-controlled

In this complex environment, we believe there are several tangible takeaways for fixed income investors.

• Active management is critical. Tight spreads and asymmetric risks demand rigorous credit selection and dynamic allocation.
• Diversification across regions. Developed markets duration offers resilience, while emerging market debt can provide yield enhancement and diversification.
• Liquidity and risk controls. We think it’s important to maintain flexibility and liquidity to navigate potential dislocations from policy surprises or geopolitical shocks.

Looking ahead into 2026, our key insight is that the environment offers a supportive yet nuanced backdrop for fixed income investors. While global policy remains accommodative and growth expectations tilt in a positive direction, tight valuations and emerging credit stresses underscore the need for vigilance, diversification, selectivity and active risk management.

As far as diversification goes, we continue to see emerging markets and Asia as excellent mid- to long-term investment destinations given structurally improving macro fundamentals. Meanwhile, investors should also consider diversifying portfolios using different instruments. For example, we see a good case to selectively add floating rate notes, high-quality securitised credits and convertible bonds as diversifiers to multi-sector, income-generating portfolios. As corporate credit spreads compress, securitised credits remain relatively more attractive on a duration and rating-adjusted basis. In general, we believe a truly globalised, diversified and high-quality portfolio with active duration management is strongly positioned to generate income with resilience in today’s macro backdrop.

Sources

1 Source: The Hindu, 4 March 2024

2 Source: Reuters, 4 September 2025

3 Source: AllianzGI, Preqin (Private Markets in 2030 | Preqin)

4 Ibid.

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