Going into 2026, the fixed income landscape is still shaped by a decisive break from the 2010–2021 regime of zero interest rate policy (ZIRP) and quantitative easing (QE). Positive real yields remain across the major developed markets, enabling investors to earn inflation‑beating returns while maintaining short duration and minimal credit exposure. Policy and politics will remain powerful drivers. The US looks set to ‘run it hot’ with persistent fiscal impulse and a more dovish tilt in monetary policy, while Europe, led by Germany, continues to rearm and rebuild via infrastructure and defence investment. In the UK, the budgetary stance has front‑loaded spending and back‑loaded tax rises, but the larger risk in 2026 is political with heightened uncertainty around leadership and policy direction which could force the gilt market to price more sovereign credit risk, steepening the curve and penalising the long end.
Our core stance for 2026 is simple and disciplined: stay anchored at the short-end of the curve where the math’s works in your favour, maintain a high quality bias in credit, and let carry and compounding do the heavy lifting, complemented by the customary alpha generation. We expect longer‑dated rates to be volatile and to underperform; we see limited upside in high yield given tight spreads and a default cycle normalising toward long‑run averages. Private credit will continue to reveal hidden ‘cockroaches’ where marks are stale and underwriting less robust, though strong nominal growth may delay the most acute stress. We will remain active, selective, and opportunistic, adding paper that prices wider than fair value, and tactically extending duration only into dislocations when central banks may need to act as lenders of last resort to restore market order.
US: A hot run and a steeper curve
The US remains the global engine of nominal growth. In 2025, GDP readings are c.4% real with core inflation around 3%, producing nominal growth near 7%. This is a powerful tailwind for global growth and by extension, markets. Entering 2026, the fiscal impulse stays alive through the “One Big Beautiful Bill”, tariffs are encouraging onshoring of manufacturing and the AI boom continues.
On the monetary side, a more dovish policy reaction function is plausible. Even if the overnight rate nudges lower, the Fed may tolerate above‑target inflation for longer, prioritising growth and financial stability over strict disinflation. When the front end is anchored by policy but the term premium rebuilds under fiscal expansion and issuance, the long end must ‘do the work’ that the overnight rate won’t. The result is a steeper curve.
Portfolio implication: in both credit and rates we favour USD exposures in the front-end of the curve where yields are still positive in real terms and carry is robust, without taking a great deal of price risk. We expect very healthy USD corporate issuance this year driven by large-cap tech, which will present opportunities but may widen credit spreads. In the main we intend to keep duration modest and use dislocations to add selectively; otherwise, we let front‑end compounding do much of the leg work.
Europe: Real yields return, fiscal re‑armament
Real yields in Europe have finally turned positive after the long pre‑pandemic stretch of negative real rates. Germany’s step‑up in investment by raising infrastructure and defence outlays from roughly 1.3% to near 2.8% of GDP signals a sizeable fiscal boost for the bloc. Combined with generally elevated issuance needs, this supports a similar dynamic to the US. The long end shoulders more volatility while the front end pays investors without a great deal of price risk.
Portfolio implication: we will maintain core EUR duration in short‑dated, high‑quality credit. There have been and there will continue to be opportunities in short-dated senior and subordinated paper from strong investment‑grade issuers. Expect the utility of long duration to keep diminishing in 2026 as fiscal supply and modest inflation persistence cap rallies beyond the belly of the curve.
UK: Politics over economics
The UK’s near‑term macro picture is less gloomy than Rachel Reeves’ rhetoric suggests. The most recent budget constructed a path of front‑loaded spending coupled with back‑loaded taxation which is marginally supportive for growth in 2026. On pure economics, gilts should trade somewhat lower in yield than they do today. However, the market is rightly demanding a sovereign risk premium because the dominant tail‑risk is political rather than cyclical.
By mid‑2026, local election outcomes and intraparty dynamics may be a catalyst for a leadership change and a subsequent leftward policy shift, increasing uncertainty for debt sustainability and market discipline. Quotes from prominent figures arguing that the country should not be ‘in hock to the bond market’ betray a limited appreciation of how sovereign finance works. The bond market is, in effect, the country’s banker. When fiscal choices collide with market tolerance, yields rise and the curve steepens, transferring discipline from the central bank to the term structure of rates.
Portfolio implication: in Sterling, we prefer to hold low‑beta credit in the short-end of the curve and keep powder dry for tactical longs only if the long end dislocates and the Bank of England has to step in once again to ensure orderly conditions.
Duration: Why the long end still underperforms
Several reinforcing forces argue against heavy allocations to long duration in 2026: (1) Fiscal expansion and issuance elevate term premia. (2) Monetary policy that is comfortable ‘running hot’ allows inflation to stay sticky in the 2.5–3.5% range. (3) Political risk, in the UK especially but not exclusively, adds a sovereign credit premium. And last but not least (4) JAPAN! Although it is not one of our core credit markets, it certainly is important from a rates perspective. With inflation still above 2%, the BoJ has signalled it is keen to keep going and continue to raise rates. Put together with record fiscal issuance we expect higher yields across the Japanese curve in 2026. All this leads us to be relatively shy of long-dated bonds.
In contrast, the front end presents attractive asymmetry. For example, if yields rise 100bp, price losses on short-dated bonds are modest and quickly offset by higher reinvestment rates; if yields fall or stay range‑bound, carry wins. With real yields positive, investors can meet return objectives without stretching for duration. Tactical lengthening of duration can be valuable, but they should be episodic at most.
Credit: Limited upside, defaults normalising
Spreads have room to grind tighter in early 2026 if US growth remains firm and Europe’s investment cycle accelerates. Even if we revisit pre‑GFC tights, the residual carry pick‑up from high-yield versus high-quality investment-grade paper is limited, leaving little convexity and not much to play for. Meanwhile, the default cycle continues to ‘normalise’ after the ZIRP/QE era that kept zombies alive. Long‑run US high‑yield default average is near 4.5%, today’s realised rates have moved off the floor and are trending upwards, consistent with a rolling adjustment rather than a systemic shock.
Portfolio implication: keep high‑yield exposure modest and extremely selective. We prefer ‘high‑yield‑rated bonds from investment‑grade issuers’ e.g., subordinated paper from global champions— over true high‑yield issuers with higher leverage and episodic market access. That way, you harvest spread and structural features without underwriting fragile business models. Avoiding momentum‑chasing into late‑cycle compression; the downside asymmetry is poor once spreads sit at historically tight percentiles.
Strong nominal growth and all that extra liquidity
A central feature of the new regime is abundant nominal growth that throws off many more dollars than we got used to in the 2010s. When global nominal GDP is robust, the system creates and circulates these new USDs that cushion markets against breaking. This is the opposite of the ZIRP era, when meagre nominal growth meant less growth in cash terms and hence more market fragility. Money‑market assets swelled during the rate‑hiking cycles and, while they may ebb as front‑end rates decline, the rotation will be gradual. For bond investors, this backdrop supports carry strategies, enhances resilience to shocks, and keeps the marginal bid for quality paper healthy.
Portfolio implication: stay fully invested at the front end, using rolling maturities to compound returns and retain agility. Use this positive market momentum and the liquidity from high nominal growth to continue to work the portfolios hard, taking advantage of miss-pricings in order to generate alpha in the funds.
A Note on Private Credit: Hidden risks, slower recognition
Private Credit has grown rapidly, often with marks that lag reality. The combination of covenant‑lite documentation, sponsor influence, and valuation practices can keep loans ‘at par’ until sudden re‑ratings force large write‑downs, sometimes from par to deeply impaired in a single reporting cycle! Strong nominal growth driven by loose fiscal and monetary policy in the US may delay the most acute phase of repricing, but the underlying issues, weak underwriting standards and limited transparency, persist.
Conclusion: Earn real, keep risk contained
For us, the 2026 fixed income playbook is disciplined and pragmatic. Positive real yields in high-quality investment-grade bonds at the front end should give us solid returns with sensible risk. Fiscal expansion and political dynamics argue for caution on the long end, where term premia and volatility are rebuilding. Credit offers selective opportunities, but the cyclical tailwinds do not justify a broad‑based stretch into lower quality at tight spreads as default rates normalise.
We will stay focused on high‑quality carry, short‑dated compounding, and as usual opportunistic engagement in primary markets in particular. When dislocations appear, especially those triggered by long‑end wobbles or policy missteps, we will be ready to extend duration tactically and harvest mean‑reversion, always with an eye on liquidity and downside protection. In a world that is running hot but paying investors to be patient, the short end is where the math’s, and the risk‑adjusted returns, add up best.
