5 ideas to help optimise bond portfolios

We believe fixed income markets will remain a source of durable value in 2026. As outlined in our 2026 outlook, fiscal stimulus, AI investment and financial market deregulation are poised to support growth this year, though the rapidly evolving Middle East conflict, persistent trade uncertainty and rising questions about central bank independence add complexity to a muddled inflation outlook. Moreover, most developed market (DM) central banks are now approaching the end of their easing cycles.

However, with yields remaining mostly elevated, we believe fixed income markets still offer investors a compelling entry point. At the same time, the increased risk of volatility underscores the importance of an active approach from both a resilience and a return perspective.

Against this backdrop, we’re pleased to share our top five fixed income ideas for UK investors:

1. Unconstrained fixed income — We still think that total return fixed income strategies that are unconstrained by benchmarks are best positioned to navigate the later stages of the economic and credit cycle. Central banks are charting divergent policy paths, which can create dispersion in growth and inflation and increase the likelihood of market dislocation at a time when valuations across most sectors are elevated. In such an environment, success will likely hinge on selectivity and discipline.

In our view, UK investors can take advantage of dispersion in markets through two main avenues:

• Global sovereign and multi-currency strategies, which tend to shine during periods of macro uncertainty; and
• Broadly unconstrained strategies that offer investors increased scope to navigate the late-cycle stage by allocating across different credit sectors.

Portfolio usage: diversification, liquidity, derisking and total return

2. Differentiated US exposure— The potential end of US exceptionalism and the high levels of uncertainty regarding the future trajectory of the economy, currency and institutions suggest nimbleness is now paramount when investing in US fixed income. Notwithstanding these concerns, we believe US capital markets still offer the largest and most liquid opportunity set, justifying a continued structural allocation in UK investors’ portfolios. However, we think a more flexible total return approach may yield better outcomes in today’s environment. It may allow investors to use the dynamic combination of US Treasuries with global credit to create more resilient portfolios that can pivot in response to potential market dislocations.

Portfolio usage: diversification, liquidity and total return

3. European investment-grade credit— In our view, still-elevated government bond yields mean that investment-grade (IG) credit remains appealing from a carry and income perspective, despite tight spreads. Within the universe, we think European IG credit stands out because of its still-robust cycle, strong investor demand and the attractive fundamentals of higher-quality issuers. Moreover, we expect volatile periods over 2026 to create significant opportunities for alpha generation through security selection and sector allocation.

Portfolio usage: income, derisking and liquidity

4. High-yield credit — Despite spreads nearing historic tights, we think all-in yields remain appealing. In our opinion, falling interest rates and strong AI-driven investment are likely to extend the credit cycle, even as parts of the US economy soften. However, we think investors should be prepared for increased dispersion amid rising tail risks, with potential capital misallocation in private credit, data centre-related borrowing and geopolitics being the areas of most concern. In our opinion, 2026 will be a year where rigorous fundamental analysis of issuers could make the difference given the likelihood of growing dispersion. Investors need to ensure exposures are aligned with the winners rather than the relative losers of this fast-changing environment.

Portfolio usage: total return and income

5. Emerging markets debt — We believe emerging markets debt (EMD) can be both a return driver and a diversifier of fixed income allocations. While EMD has historically been more cyclical and volatile than its DM counterparts, we see reasons to be structurally positive on the asset class as risks are increasingly originating from developed markets amid disruptive US policy dynamics.

In our view, the asset class also stands to benefit from muted default forecasts, given the potential for already solid fundamentals to improve further across growth, fiscal and external metrics. That said, late-cycle dynamics, evolving US tariff policy and heightened geopolitical risks are likely to drive higher dispersion, reinforcing the importance of bottom-up security selection.

Portfolio usage: income, return and diversification