Top 5 fixed income ideas for European investors

After delivering strong total returns in 2025, 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 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 European investors in 2026:

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, European 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.

Overall, we believe it’s critical to remain nimble, with appropriately scaled allocations to liquid assets such as government bonds that may help enhance portfolio resilience without sacrificing returns. We also believe that patience and precision are likely to be rewarded, as the need persists for a disciplined search for opportunities amid tight valuations.

Portfolio usage: diversification, liquidity, derisking and total return

2. 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. While the valuation dispersion across regions, sectors and issuers is low, we expect volatile periods over 2026 to create significant opportunities for alpha generation through security selection and sector allocation. European IG bonds also tend to offer a meaningful duration cushion that can serve as a counterbalance to credit risk in the event of a sudden deterioration in credit fundamentals. Overall, we expect European IG credit to provide investors with attractive yield potential and a stable performance pattern in 2026. In addition, we see growing scope for alpha generation when dispersion returns.

Portfolio usage: income, derisking and liquidity

3. Euro 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. In addition, Europe should benefit from easier financing conditions and solid household savings. We expect corporate fundamentals to remain largely stable and default rates to decline towards long-term averages over the next 12 months given the favourable credit dynamics mentioned above. 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. Furthermore, we expect structural trends such as Europe’s unfolding regime change to have an increasing impact. In our view, 2026 will be a year where rigorous fundamental analysis of issuers will 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

4. Emerging markets debt — As an asset class, we believe emerging markets debt (EMD) can be both a return driver and a diversifier of fixed income allocations, particularly for European investors. 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.

From our perspective, current high yields in EMD offer a reasonable proxy for expected returns for the year ahead. 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. The macro backdrop is also broadly constructive, with contained inflation, scope for more rate cuts and fiscal support underpinning global growth. While EMD markets have mostly proven their ability to withstand geopolitical headwinds over recent years, we believe it is important to monitor the impact of late-cycle dynamics, evolving US tariff policy and geopolitical risks. In combination with growing political and fiscal divergence across countries, these factors are likely to drive higher dispersion, reinforcing the importance of bottom-up security selection. While valuations in aggregate are now challenging, we still see pockets of attractive valuations especially within high yield and smaller EM sovereigns.

Barring unanticipated shocks, we think EMD could make a positive contribution to well-diversified portfolios this year, given the tailwinds of carry, potential rate compression and ongoing US-dollar weakness.

Portfolio usage: income, return and diversification

5. Securitised credit — We view this segment of the credit market as a valuable source of potential diversification and income within multisector fixed income and broadly diversified portfolios. In 2026, we think securitised sectors will remain a source of attractive yield relative to investment-grade corporates, supported by structural protections and shorter spread durations that may help cushion against rate volatility. Critically, we believe that securitised credit provides exposure to distinct economic drivers — consumer, housing and commercial property — potentially reducing correlation with traditional corporate credit and enhancing portfolio resilience in an uncertain macro environment.

Overall, fundamentals have been normalising. However, performance may vary significantly by subsector and borrower type, making security selection critical.

Segments where we see the most appeal include:

• non-agency residential mortgage-backed securities (RMBS),
• higher-quality consumer asset-backed securities (ABS) and
• select commercial mortgage-backed securities (CMBS).

We also observe select potential in collateralised loan obligations (CLOs) as they remain supported by resilient bank-loan fundamentals.

Portfolio usage: income, total return and diversification