Top 5 fixed income ideas for insurers in 2026: Give ground on risk, but just a little

For fixed income markets, 2025 may be a hard act to follow. High carry, tighter spreads, and accommodative monetary policy all contributed to impressive total returns. That said, we still see attractive opportunities for insurers. While inflation bears watching amid questions about tariff policy and Fed independence, we think fiscal stimulus, AI spending, and deregulation could lift growth, which should bolster spread sectors. There are risks to our outlook, of course, including worries about consumer spending and manufacturing, but bouts of volatility could also open attractive entry points for sector rotation and security selection. Taking all of this into account, we think insurers may want to take some risk off the table in 2026 but still maintain a cautiously optimistic approach.

Against that backdrop, here are five fixed income ideas to consider:

1. Investment-grade private credit — We maintain a constructive view on investment-grade private credit, positioning it as a strategic complement to traditional fixed income allocations. The asset class has continued to deliver attractive illiquidity premiums, providing meaningful relative value in a market where spread opportunities remain constrained. Strong covenant protections and bespoke structuring enhance downside resilience, while robust deal flow across sectors and geographies supports diversification and portfolio stability.

Importantly, private credit offers investors the ability to negotiate terms tailored to their risk and return objectives, creating potential opportunities for incremental spread capture and improved risk-adjusted outcomes. Today’s evolving credit conditions call for disciplined underwriting and experienced managers with deep sourcing networks who are well positioned to navigate complexity and deliver consistent performance. Provided these conditions are met, investment-grade private credit stands out as an appealing solution within the broader fixed income landscape for long-term investors seeking enhanced yield and structural protections without sacrificing credit quality.

Consider funding from: investment-grade public credit, private direct lending, high yield

2. Securitized credit — We hold a constructive view on securitized credit, seeing it as a potentially valuable source of diversification and income within multi-sector fixed income portfolios. Despite tighter spreads across most credit markets, securitized sectors continue to offer attractive yields relative to investment-grade corporates, supported by structural protections and shorter spread durations that can help cushion against volatility.

Fundamentals have been normalizing from strong levels, with performance expected to vary by subsector and borrower type, making security selection critical. We see opportunities in areas such as seasoned non-agency residential mortgage-backed securities (RMBS), higher-quality consumer asset-backed securities (ABS), and select segments of the commercial mortgage-backed securities (CMBS) market, while collateralized loan obligations (CLOs) remain supported by resilient bank-loan fundamentals. Importantly, securitized credit provides exposure to distinct economic drivers — consumers, housing, and commercial real estate — potentially reducing correlations with traditional corporate credit and enhancing portfolio resilience in an uncertain macro environment.

Insurers can utilize traditional public markets for this exposure or seek private market exposure through the growth of asset-backed finance (ABF) or exposure via lending into commercial real estate transactions. For the latter, we currently favor transitional real estate deals that seek to take advantage of the large-scale shifts happening within the commercial real estate sector.

Consider funding from: high-quality fixed income, corporate credit exposure

3. CLO equity — While we acknowledge the near-term CLO arbitrage rate remains tight, we view CLO equity as an attractive intermediate to long-term investment opportunity, supported by two rare and meaningful regulatory tailwinds. In the US, recent guidance easing leveraged lending constraints could allow banks to reenter the broadly syndicated loan market, increasing loan supply and potentially widening spreads at a time when M&A activity is expected to pick up. This shift may also reintroduce higher-risk borrowers into syndicated markets, creating opportunities for active managers to capture incremental yield. Meanwhile, in Europe and possibly the UK, proposed regulatory changes are set to make senior tranches more appealing, particularly to insurers, by reducing capital charges and streamlining due diligence requirements. Stronger AAA demand should lower CLO funding costs, improving equity returns over time.

While these dynamics will take years to fully materialize and require careful credit selection, the combination of greater loan supply, more attractive spreads, and reduced financing costs positions CLO equity for compelling forward return potential in a changing market landscape. Absent a severe default cycle, even credit spread volatility could create an attractive opportunity set for equity holders via the CLO equity structure, which can provide term, locked-in, non-recourse funding to potentially take advantage of cheaper collateral. For insurance companies, the risk-based capital charges for CLO equity are equivalent to those for private equity (particularly for P&C and health care companies). But importantly, cash may be returned earlier than with private equity, which could make CLO equity more attractive from a cash-flow and regulatory capital perspective.

Consider funding from: equities, high yield

4. The Federal Home Loan Bank (FHLB) funding trade — This is obviously not applicable to insurers around the globe, but we view it as a compelling and potentially evergreen opportunity that makes sense when spreads are tight across a variety of fixed income asset classes. A prerequisite of executing the trade is membership in the Federal Home Loan Bank System.

In this paper, our colleague offers a detailed look at this opportunity for US insurers, including the mechanics of the loan program, collateral requirements, regulatory treatment, key considerations for pursuing yield enhancement or alpha objectives, and potential risks.

Consider funding from: high-quality corporate credit (or executing a trade using existing collateral)

5. Emerging market sovereigns and/or global high yield — In point of fact, we view this not as a “best idea” but rather as a potentially interesting allocation for an insurer looking to begin the process of marginally derisking from equities or feeling private credit fatigue but still requiring a good expected rate of return.

We acknowledge that spreads remain tight for both emerging market debt (EMD) and global high yield. But we see compelling reasons to look at hard-currency EMD. Overall emerging market credit quality remains robust. We are not witnessing the imbalances that have periodically plagued the market — liquidity levels are comfortable, debt burdens are stabilizing, and current accounts are more balanced. In addition, emerging market central banks have been ahead of the curve on inflation and they hiked aggressively during the inflationary period, leaving them in a better position to cut rates to spur growth. Finally, the sovereign portion of the asset class may provide diversification to corporate credit. As of this writing, the widely used JP Morgan EMBI Global Diversified Index offered a yield to worst of 6.80%, which we find attractive given the overall index average rating of Ba1/BB+/BB+. And discerning active managers could improve on those results by weeding out the most problematic credits.

For insurers who are not familiar and/or comfortable with emerging market sovereign debt, global high yield could serve as an attractive alternative.

Consider funding from: equities, private credit (given the above-mentioned fatigue)