Bond navigators: what matters in 2026

It's easy to say that 2025 has been a turbulent year for markets, but was it really? We feel the story of 2025 was one of persistent external noise that generated headlines but did not ultimately derail fixed income markets.

Approaching the end of the year, and before we finalise our Outlook for 2026, I chaired an interactive discussion, in front of an audience of institutional investors and advisors, amongst our Fixed Income team leaders: Head of Rates & Cash, Craig Inches; Head of ABS & Leveraged Finance, Jeremy Deacon: and Head of Credit, Paola Binns. Together, they discussed how the past year played out and tackled what, if any, are the potential road bumps ahead.  

Fundamentals matter – but so do technicals

For our Rates strategies, a key shift has been in issuance dynamics. After a surge in long-dated supply early in the year, the fourth quarter saw a sharp pullback as governments acknowledged the unsustainable cost of locking in high yields. As a result, we expect a glut of short to medium-dated issuance ahead, with curve flattening more likely while long supply remains constrained.

Generally, we think inflation should grind lower, but growth risks loom. Central banks are nearing the end of their easing cycles, and any uptick in unemployment or wage weakness could unsettle risk assets. For investors, the environment demands flexibility: global diversification, active curve positioning, and inflation hedges will be key. Opportunities lie in global sovereign strategies and index linked bonds — not just to weather volatility, but to exploit it.

We think inflation should grind lower, but growth risks loom

ABS: an area of interest

In the ABS market, demand is robust, particularly in the US mortgage space. However, as demand hits record highs, we could see the risk of ‘criteria creep’ if lenders lower their standards and seek to capture additional returns, increasing the likelihood of a potential fallout.

There is a fear that there is too much credit in private markets, and their opaque nature could lead to problems developing before they can be spotted. In which case, we see the key as active management. You have to time any move in volatile markets correctly. Spotting where these issues might come from, however, is a different skill. It is always difficult to know what the catalyst will be for a potential downturn but our investment philosophy is that active management of your portfolio is the best way through it.

However, we feel it is important to note that we see ABS as relatively cheap versus other parts of the credit market. The market still suffers from a hangover from 20 years ago, where the global financial crisis saw all ABS under the spotlight, despite most of the problems during that period being caused by a single subset – excessively-levered vehicles exposed to US sub-prime mortgages. And the bad press still lingers. As a result, we see bonds in this market as cheap and there is still a lot of money still to be put to work in the sector.

Income always a focus

In our sterling credit strategies, our focus is on income generation. We feel that, although spreads are near to historically tight levels, the potential for strong returns built on credit income as part of all all-in yield continues to look attractive. Even if spreads widen, attractive income generation as a bedrock of attractive risk-adjusted returns will still be available. As such, our research suggests credit spreads continue to over-compensate investors for fundamental risks and, while volatility seems to be the new normal, credit markets have shown a remarkable ability to cut through the noise.

Our research suggests credit spreads continue to over-compensate investors for fundamental risks

None of this is lost on credit investors, in general, and demand (and the supply to meet it) is strong. It is up to us to find the best ways to access the value it offers in our portfolios.

Finding a way through 2026

Active management has always been critical in credit due to enduring inefficiencies and moving into 2026, it feels the driving forces of compression mean that it is more important than ever.

The next 12 months will not be quiet. Investors who embrace flexibility, portfolio diversification, and active management across fixed income should be best placed to navigate – and capitalise on – volatility across rates, inflation, and policy regimes.

To read further thoughts across Royal London Asset Management’s investment teams, including Craig, Jeremy and Paola, keep a look out for our annual Outlook, coming soon.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.

The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.