Fixed Income Outlook: What’s driving bond markets today?

One of the most defining feature of today’s fixed-income environment is the strength, breadth and durability of income. For the first time in more than a decade, investors across regions can build higher quality portfolios with less volatility and materially higher yields. This is not just a U.S. story: Euro area, U.K. and Japanese markets all currently offer compelling foreign exchange-hedged real yields, while securitized sectors, global corporate credit and emerging markets (EM) can provide meaningful income diversification.

While this window won’t last forever — potential policy easing expected later in 2026 would eventually push yields lower — the opportunity today is unusually attractive, supported by starting yields that remain in the top third of their long term ranges across both U.S. and European investment grade markets, especially in securitized products.¹

Income did its job in 2025; we believe the conditions for a repeat are still in place.

This is an environment where active fixed income can play a more meaningful role in portfolios.

The fixed income landscape is currently defined by a tension we think will persist for some time: a macro environment clouded by supply-side inflation and policy uncertainty, set against the most attractive yield opportunity in over a decade.

Navigating that tension requires what we call Dynamic Patience: building income deliberately, staying tactical on duration and deploying capital creatively when the market misprices risk.

The escalation of geopolitical tensions in the Middle East drove  significant moves in front-end rates across developed and emerging markets. For instance, the German 2-year bond moved 72 basis points (bps) and Brazil's 2-year bond moved 158 bps.¹

Further, oil spiked in a way that immediately reshaped inflation expectations, pushing European markets to price policy rate hikes instead of cuts. Equities fell nearly 10%, and yet U.S. Investment Grade 10-year spreads widened just 15 bps and high yield BB  widened 54 bps, underscoring the resilience of credit fundamentals.² Yet, this also highlights how narrow the compensation is for taking blunt spread risk at current levels.

The U.S. economy has remained structurally sound. Indeed, real household wealth is near all-time highs, debt-to-net-worth is at a seven-decade low, and capital spending is elevated with the AI buildout providing durable support.

Even with crude oil prices at greater than $100/barrel, we expect 2.1% real GDP growth this year, but the resilience is unevenly distributed. The fact is that the top 30% of consumers by income account for roughly half of all spending, and lower-income households spend 3.7% of income on gasoline versus 1.5% for the top decile.³

A major U.S. airline reported in the first quarter that premium and loyalty revenue grew in the mid-teens, even as economy-class volumes softened. This is the same economy, but increasingly we are witnessing very different experiences under the surface, as an energy shock doesn't soften demand uniformly; it concentrates stress in exactly the consumer-facing sectors where credit selection matters most.

The Federal Open Market Committee’s inflation assessment was upgraded to "elevated," and the range of plausible forward policy paths is wider than at any point since the cutting cycle began.

The urgency to ease has diminished, and absent a meaningful deterioration in labor markets, the timeline for any further cuts has likely extended.

At the same time, U.S. front-end issuance now exceeds 100% of GDP, more than triple what it was just 10 years ago.⁴ The sensitivity of the debt trajectory to the path of rates and nominal growth means the fiscal position remains a critical variable in the policy calculus. For our portfolios, the implication is clear: the rate path is too uncertain for concentrated duration bets. We favor income-producing assets where carry adequately compensates us for holding through volatility, rather than making large bets on the direction of various points on the curve.

Credit spreads sit near the 5th percentile of the last eight years, and we do not see a compelling opportunity in spread compression from here.⁵ But all-in yields have risen alongside rates, and a diversified, income-oriented approach that uses the full fixed income universe, including securitized assets, European credit and emerging markets, have been generating north of 6%, compared to roughly 4.6% for the Bloomberg U.S. Aggregate Bond Index.⁶

In fact, high-quality, carry-focused, portfolios would potentially deliver five times the real income of a cash allocation.⁷ We view this as a generationally attractive proposition for using fixed income as a source of meaningful, reliable income. Over any reasonable horizon, it is persistent carry, not attempting to time the bottom, that drives real returns.

In our latest Fixed Income Outlook, our teams across global markets explore these themes in greater detail, highlighting the opportunities and risks we see across regions and sectors.