Despite ongoing uncertainty around inflation, deficits, geopolitics, and interest rates, the case for fixed income has strengthened. Higher yields provide attractive income and have materially improved prospective returns. Investors have taken notice: Recent strong demand reflects growing recognition that today’s yield environment offers compelling value across a range of potential outcomes.
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What changed: Markets began the year expecting rate cuts, but have shifted direction due to a more resilient economic backdrop. This firm growth environment, combined with higher energy prices and surging global bond issuance, has forced global yields higher and increased dispersion across fixed income markets.
Why it matters: Despite ongoing uncertainty around inflation, deficits, geopolitics, and interest rates, the case for fixed income has strengthened. Higher yields provide attractive income and have materially improved prospective returns.
Base case: Looking forward, we expect growth to remain strong and the labor market to remain stable. As inflation remains elevated, we expect the Fed to remove the insurance cuts delivered in 2025 while remaining sensitive to incoming data.. With U.S. yields around fair value, we're neutral on U.S. duration while volatility and dispersion are creating opportunities for relative value across regions and sectors.
Mortgage-backed securities (MBS): We continue to find attractive opportunities in MBS and have increased our overweight, particularly in structures with more predictable cash flows and less extension risk.
Credit issuance surge: Record bond issuance has created sector dispersion, particularly in technology. We continue to favor investment-grade credit for its combination of yield, quality, and resilience.
Global rate dynamics: Policy normalization in Japan and diverging fiscal dynamics in Europe are creating relative value across global rates markets. In Japan, the BoJ’s continued tightening has pushed government bond yields higher and flattened the yield curve as investors price a faster pace of normalization. In Europe, persistent inflation and renewed fiscal concerns have increased dispersion across sovereign bond markets, with France at the center of the repricing.
Active positioning: We remain underweight France and Italy relative to Germany amid elevated fiscal and political risks and continue to favor German Bunds relative to U.S. Treasuries. In Japan, we maintain a short-duration, curve-flattening bias while remaining overweight European inflation-linked exposure.
French OAT spread over German bunds
Source: Bloomberg, as of September 30, 2026. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Publication date: October 2026
Notes:
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Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
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