This year, fixed income markets have exhibited elevated levels of interest rate volatility, whereas credit spread volatility has been more contained.
This backdrop is a natural consequence of the higher nominal growth environment that authorities are incentivised to maintain in a bid to deal with persistent structural deficits. The first press conference held by Kevin Warsh as new Fed Chair made it clear that forward guidance is not, in his opinion, an effective part of the Fed’s toolkit.
For investment-grade portfolios it is therefore important to build actively managed and balanced portfolios combining credit risk with interest rate risk.Against a strained and uncertain geopolitical backdrop, the need to construct portfolios with the potential for diversified income streams is also essential, as is having the ability to actively trade if circumstances were to change. The focus therefore shifts to a portfolio’s liquidity.
These characteristics lie at the heart of portfolio construction for multi-sector credit strategies, which can provide an investment-grade credit profile whilst tapping into areas of credit that can generate quality income streams, including BBB/BB bonds, subordinated debt, high-quality collateralised loan obligations (CLOs), and EM sovereign bonds denominated in local currencies. A scenario of growth without economic overheating – which could well be justified given the current environment – favours a selective approach to this sort of bond investments, with a focus on high-quality income.
More specifically, BB-rated bonds continue to offer a significant spread over BBB-rated bonds, despite historically having very similar risk profiles in terms of default rates. The BB segment offers a wide range of opportunities in companies active in essential infrastructure and which are capable of generating stable and predictable cash flows. For CLOs, fundamentals should remain favourable, as default rates in the underlying leveraged loan pools are likely to remain low amid satisfactory nominal GDP growth in Europe and the United States.
Certain emerging market currencies should see their upside potential persist, especially those which offer an attractive carry profile and which provide a source of diversified income. Local-currency sovereign bonds from Brazil, Mexico and South Africa should also offer attractive real yields, along with improving fundamentals.
Adopting such an approach to credit markets – i.e. one that is less constrained by benchmarks – can enable us to seize opportunities across the entire spectrum of this asset class. It would be prudent to maintain a diversified allocation across the high-income credit segments, which should put in resilient performances throughout the economic cycle due to their defensive nature in terms of default rates.
As the conflict in the Middle East draws to a close, attention should move back to the AI revolution. This technological transformation is redefining industries and generating unprecedented demand for specific raw materials and hardware.To capitalise on this long-term opportunities and the expansion of earnings, a focus on long tech positions through convertible bonds should be favoured, and in particular on major hyperscaler partners. This approach to credit provides the opportunity for equity-like returns while offering the downside protection of a fixed-income instrument.
Active interest rate management has also been critical amid US–Iran tensions. At the start of the conflict, portfolios carrying USD duration and minimal EUR duration avoided the ECB repricing and European rates’ underperformance. After markets priced in three ECB rate hikes, it seemed preferable to rotate duration away from the dollar towards the euro, thus reducing exposure to the Fed’s subsequent repricing.
Being allocated to these segments of credit markets, along with active duration management, has allowed multi-sector fixed income strategies to continue their outperformance relative to the traditional investment grade segment.
This is especially the case as peak inflationary pressures should have passed, given the decline in energy prices, whilst underlying core inflation dynamics (i.e. excluding energy and food prices) remain well behaved, with real incomes continuing to decline as wage growth slows. This should result in central banks not being as restrictive as the markets had expected. With all-in yields within the asset class elevated, it is time to be invested in the market to reap the benefits, rather than trying to precisely predict its fluctuations.
The opinions expressed herein are correct as at 26 June 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
The views and opinions expressed by fund managers (internal or external) may differ from the house view. They are shared for informational purposes and do not constitute investment advice or a recommendation.
