Bond strategies pivot to govts, EMs

GLOBAL bond markets head into 2026 with investors positioning for easing monetary policy, shifting growth dynamics and a search for durable income as cash returns fade.

Across regions, yields remain the anchor, volatility is expected to resurface, and allocation choices hinge on where policy, inflation and fiscal risks settle over the next year.

Fixed income is framed as a core allocation rather than a tactical trade.

The emphasis is on harvesting income while navigating diverging cycles across countries and maturities.

Within that context, government bonds regain prominence, emerging markets (EM) draw steady interest, and credit is treated with caution as valuations compress.

In its recent outlook report, Standard Chartered Bank points out that it views global bonds as a core holding.

The bank sets out a clear hierarchy within fixed income, noting: “We have a relative preference for government bonds over corporate bonds (‘rates’ over ‘credit’) given still-attractive nominal yields, which stands out against expensive corporate bond valuations.”

That preference extends across geographies.

“We prefer EM over developed market (DM) bonds,” Standard Chartered says, citing yields and macro fundamentals.

It highlights that it is “overweight” on both EM US dollar government bonds and EM local currency (LCY) government bonds, driven by expectations of benign inflation, dovish policy, fiscal improvement and a weaker greenback.

Nominal yields of around 6% in EM are described as offering attractive risk adjusted yield pick-up when compared to DM bonds.

Within DM, the bank strikes a more defensive tone on credit.

“Within DM bonds, we are ‘underweight’ both investment grade (IG) and high yield (HY) corporate bonds,” it says, stressing that the view reflects valuation rather than credit quality.

Yield premia over US Treasuries are close to historically tight levels, leaving limited buffer against volatility or issuance risk.

On rates, the outlook is shaped by US monetary easing.

Standard Chartered says: “In the United States, we anticipate short-term yields will decline more than long-term yields due to Federal Reserve (Fed) rate cuts to 3% by end-2026, resulting in a steeper yield curve.”

Uncertainty around fiscal dynamics, inflation and Fed independence after a new chair takes office is flagged as a source of volatility.

Still, the bank highlights that it would use any resulting yield rebound to lock in higher absolute yields to hedge against the risk of ever-lower cash yields.

Specific maturity preferences also emerge.

“We see US 10-year government bond yields above 4.25% as attractive since we expect it to ease to the 3.75% to 4% range over the next six to 12 months,” Standard Chartered says, while adding that five-to-seven-year bond maturities offer a balance between yield and risk.

In Asia, the tone is measured.

“Asia US dollar bonds continue to offer reasonably attractive yields,” the bank says, noting that targeted China stimulus underpins sentiment.

It believes a peak in China property defaults and regional refinancing risks is likely behind the market, although geopolitical uncertainty remains a key risk.

Its positioning is “neutral” between Asia IG and HY bonds.

Focus on quality

OCBC Bank also frames 2026 as a carry-driven year.

“We expect the fixed-income asset class to continue to be supported by carry in 2026,” it says, with credit spreads near all-time tights.

The bank emphasises quality, noting: “We do not rule out greater dispersion in the year ahead and prefer to stay with high quality issuers.”

As the Fed eases, IG and selected better quality HY bonds should benefit from still stable fundamentals and lower funding cost, while the overall stance on duration remains neutral.

US rates are seen as sensitive to incoming data.

OCBC says US Treasuries will remain sensitive to shifting macro signals, pointing to inflation above target, a cooling labour market and uneven consumer strength.

Fiscal dynamics and issuance needs are also highlighted, with the conclusion that yields on the 10-year US Treasuries may stay range-bound.

Beyond rates, OCBC outlines a complex credit backdrop.

“The global economy is likely to continue to face a complex landscape in 2026,” it says, with themes ranging from debt-funded artificial intelligence capital expenditure to greater interconnectedness between public and private credit markets.

Late-cycle risks prompt caution. “We believe late credit cycle dynamics warrant avoidance of riskier segments such as subprime, leveraged credits, smaller regional banks, and complex financing structures.”

Valuations reinforce that stance. With the yield differential between DM HY and DM IG at historically low levels, OCBC says it currently does not see DM HY providing adequate compensation for investors to move down the credit curve.

For 2026, it recommends a “neutral” positioning on DM IG bonds and “underweight” on DM HY bonds, while stressing that focus on quality and thorough analysis of issuer fundamentals should help protect portfolios.

On Asia, OCBC remains “neutral”. Default rates are expected to be manageable, technicals supportive and returns driven by carry rather than spread compression.

“Fundamentals for most Asian corporates remain stable,” it says, adding that the lower volatility of Asia IG should provide stable returns.

“EM sovereigns remain well-positioned amid a supportive global backdrop,” it highlights, noting this is underpinned by attractive real yields and easing inflation, though geopolitical risks warrant monitoring.

Selectivity is key

Schroders adds a more active lens to the outlook.

Its head of global unconstrained fixed income, Julien Houdain, notes that 2025 has been a year of differentiation in bond markets, with very large divergences in yield moves, both between geographies and at different maturities of the curve.

He expects that to persist into 2026 as growth, labour and inflation remain “desynchronised by country”.

Central bank divergence is central to that view.

“The Fed and Bank of England remain in the easing phase, the European Central Bank looks to be happily on hold, and the Bank of Japan is not yet done hiking rates,” Houdain says, adding that this “provides huge opportunity – but only to those who are active in their bond allocation.”

On the United States, he says the group is optimistic about the outlook for the US economy in 2026, citing fiscal and monetary easing, but cautions that policymakers could overdo stimulus.

Concerns around inflation protection and Fed credibility also feature, especially with the end of Jerome Powell’s term.

Houdain notes that after US bond outperformance, better opportunities have emerged for global portfolios.

Credit, in his view, is constrained by valuation.

“The spread earned for taking additional credit risk over government bonds is now at historically low levels,” he says, adding that with these very tight spread levels, having significant exposure here seems unwise currently.

Flexibility and readiness to deploy capital when spreads widen are emphasised, alongside opportunities in agency mortgage-backed securities and European quasi-sovereigns.

From a US-focused perspective, Schroders head of US fixed income Lisa Hornby says: “The broader US fixed income market continues to offer an attractive prospective return profile, especially as we look toward 2026.”

Selectivity is key, with value seen in high-quality duration assets such as tax-exempt municipals and securitised instruments, while avoiding “generic credit beta that no longer offers sufficient spread premium.”

Meanwhile, EM features prominently in Schroders’ outlook. Its head of EM debt and commodities Abdallah Guezour says EM debt is on track to deliver a third consecutive year of strong returns, as investors reward post-pandemic macro adjustments.

He adds that the recovery in portfolio flows is still in its early stages and has further to go, supported by easing policy, resilient growth and favourable inflation dynamics.

Guezour highlights local currency opportunities, noting that 10-year local government bond yields still offer appealing value, reinforced by stronger public debt dynamics than in developed markets.

A weaker US dollar is seen as an additional tailwind, with the conclusion that this environment reinforces the relative attractiveness of EM debt, particularly in local currency segments.