Global macro outlook
Cross-country divergences
Paul Mielczarski
Head of Global Macro Strategy
Despite significant macroeconomic and trade policy shocks, 2025 proved a remarkably quiet year for developed market bond yields. The year-to-date high-low yield range of approximately 36 basis points was exceptionally narrow compared to the average annual range of around 80 basis points for the JP Morgan Global Bond Index over the previous decade. Heading into 2026, we expect developed market yields to remain broadly range-bound. On the one hand, there are several factors that point toward the possibility of acceleration of global growth: reduced tariff drag, supportive fiscal policies in major economies, and favorable financial conditions. However, ongoing weakness in employment growth creates meaningful downside risks and limits the scope for a sustained move higher in yields.
Within this sideways aggregate picture, we see significant cross-country divergences. In the UK, we see scope for further yield declines as the Bank of England responds to the combination of deteriorating labor market conditions, falling inflation, and fiscal drag. Conversely, eurozone yields are likely to drift higher as the economy benefits from the lagged impact of substantial European Central Bank easing and the large multi-year German fiscal stimulus package. This UK-eurozone spread compression remains one of our highest conviction views.
In the currency markets, we expect further US dollar (USD) weakness in 2026. The dollar remains overvalued against most G10 and emerging market currencies. We anticipate ongoing convergence in relative growth rates after a prolonged period of US exceptionalism. Global investors remain structurally overweight USD assets, with both economic and geopolitical incentives to reduce these exposures over time. Interest rate differentials are moving against the dollar. Developed market central banks outside the US are more likely to tighten policy in the future while the Federal Reserve (Fed) remains in a dovish mode, focusing on labor market downside risks. The change in Fed leadership next year should impart an even more accommodative bias.
The macro backdrop for emerging market (EM) local currency bonds remains supportive. EM bonds should continue to benefit from elevated real yields, attractive currency valuations, the absence of major macroeconomic imbalances, and limited foreign ownership levels. In the medium term, EM local currency assets are well positioned to benefit from a softening dollar environment and growing appetite among global investors to reduce US asset concentration.
Developed market rates
Relative value remains key
Jack P. McIntyre, CFA
Portfolio Manager
We are not going into early 2026 with a pound-the-table level of conviction regarding developed market (DM) bonds. One reason is the US is playing economic data catch-up, and the quality of that data is a little suspect. Add in a combination of a still slightly softening labor market and consumption-influenced fiscal stimulus on the immediate horizon, and these factors lead me to stick with my multi-year theme of earning the coupon in fixed income. Or, said another way, yield (income) over duration (capital gains) should be the driver of total return in DM fixed income.
Heading into year end, US 10-year Treasury yields are hovering close to 4%. This level, absent a notch lower in economic growth, should be closer to the bottom of the yield range. If the labor market starts printing weaker numbers, which is not our base case, a probe into the 3.50% to 3.80% range could be in the offing. However, when you have a central bank easing monetary policy married with a government still running 6% deficits in a non-recessionary environment, it is hard to imagine a recession is likely. We would give it extremely low odds. If the US economy gains traction in the first quarter, which we see as a possibility given the onslaught of tax refunds set to hit, a move back toward 4.50% seems plausible. Above that level and the Trump administration would have to move toward less fiscal responsibility for the bond vigilantes to reappear in force, which again, is not our base case. We are coming into the new year neutral duration and not positioned for a big shift or twist in the yield curve.
It is also difficult to get too bullish on lower long-end yields when you have a Federal Reserve (Fed) cutting policy rates at a time when inflation continues to run above the target rate. Granted, future rate cuts should not be a sure thing in this environment, but we are going to be dealing with a new Fed chair in 2026. Will it be someone closely tied to the current administration? It feels like the next decade could be something akin to the 1970s when Arthur Burns and Bill Miller ran the Fed. Active bond management will do well if we get a repeat of that world.
Away from the US, the DM bond world is going to be more influenced by relative value trades. I am open to the idea that DM bond markets lose some of their correlations as idiosyncratic, or bottom-up, influences become more important than the top-down, global macro forces. We still expect the gilt market to outperform broader DM Europe as the UK has started the process of fiscal retrenchment when other European governments are still favoring fiscal expansion.
For us to get excited about owning Japanese government bonds (JGBs) in 2026, the Bank of Japan must be fully committed to tightening policy rates to a point that breaks the back of inflation in Japan. We are not there yet. JGB yields need to continue to grind higher, and inflation, which may have peaked, needs to head lower. Again, we are not there yet.
Too much debt while the price of that debt increases is a toxic mix. The bond market will discriminate via the term premia lever in 2026, which supports our core view that relative value trades will be the way to make outsized returns in the DM bond space in 2026.
Investment grade
A bond-picker’s market
Brian L. Kloss, JD, CPA
Portfolio Manager
As we move toward 2026, investment grade (IG) corporate credit increasingly resembles a “bond-picker’s market.” The broad beta trade that rewarded investors over the past two years has largely run its course; spreads have compressed and dispersion has widened.
Valuations in IG credit remain far from compelling. After years of yield-seeking flows—particularly from insurance and liability-matching buyers—spreads remain near cycle tights. But beneath the surface, the market continues to offer pockets of opportunity. Companies with improving balance sheets, deleveraging stories, and idiosyncratic catalysts can still deliver attractive relative value, even if the overall index struggles to re-rate tighter.
Investors are also increasingly focused on potential “canaries in the coal mine,” including Business Development Companies (BDCs) and technology, that may signal broader market stress to come (Exhibit 1). For BDCs, in our view, any signs of rising credit stress would have meaningful implications for the broader corporate landscape. Meanwhile, the tech sector, where mega-cap names have been pillars of index stability, faces growing scrutiny around regulation, capital expenditure (capex) intensity, and the sustainability of current leverage and growth assumptions. We believe weakness in either corner could be an early warning sign for IG credit more broadly.
High yield
Risk-off trends subside
Bill Zox, CFA
Portfolio Manager
High yield continues the positive run since late 2022, supported by the strength of equities on one side and core fixed income on the other. For the last two and a half years, the spread has been in a range of 260 to 460 basis points, based on the ICE BofA US High Yield Index. Defaults have been less than half the historic average, and recoveries have been high (Exhibit 2).
Absent a sustained bear market in equities or core fixed income, we expect the range to hold. Net new supply is starting to pick up (Exhibit 3). Spreads closer to the middle or high end of the range may be required for the demand.
Tariff-induced volatility caused some investors to hug the benchmark index and/or pile into BB-rated corporate credit, in our view, even at stretched valuations. This trend has led to the outperformance of BBs over Bs. Additionally, Bs have materially outperformed CCCs. Lastly, the top 100 high yield issuers have outperformed the broader market (Exhibit 4). These forces have reversed somewhat from the peak of the tariff-induced volatility, and we expect that to continue.
Emerging markets
Improving policy and disinflation outlook
Michael Arno, CFA
Portfolio Manager, Senior Research Analyst
For emerging markets (EM), 2025 was a strong year, despite persistent headwinds from evolving trade policy, multiple regional conflicts, and continued US-China tension. As we look ahead to 2026, the central question becomes where the next set of opportunities will emerge in the asset class. Hard currency sovereign and corporate spreads remain tight, limiting the potential for capital gains, yet carry still offers attractive income across segments of the universe (Exhibit 5). At the same time, the US dollar remains at historically elevated levels (Exhibit 6), foreigners remain heavily exposed to US assets (Exhibit 7), and the Federal Reserve is expected to continue rate cuts, taking some of the luster off relative carry of the greenback. This setup should support another positive year from local currency markets, in our view. In particular, those markets seeing improving policy credibility and disinflation momentum stand out as increasingly compelling opportunities for both income and currency appreciation.
Policy uncertainty and market volatility defined much of 2025. The Trump administration’s tariff announcements triggered a broad risk-off move in April, followed by several rounds of retaliatory measures from China. Looking forward, 2026 is likely to bring a modest reduction in US policy risk. US and Chinese officials have reopened substantive dialogue, and Presidents Trump and Xi are scheduled for four meetings in 2026, including bilateral visits in each country. The appointment of a new Federal Reserve governor on May 15 could also shift the tone toward a more consensus-oriented Federal Open Market Committee (FOMC), in contrast to the divisions seen at recent meetings. Markets continue to price a terminal rate near 3%. On the geopolitical front, momentum behind a Ukraine–Russia peace agreement raises the prospect of an end to the four-year conflict. In the US, Trump’s focus will increasingly turn to the 2026 midterms; with polls trending down, cost-of-living concerns have already led to tariff rollbacks on food and discussions around direct payments to households earning under $100,000. While policy unpredictability was a hallmark of 2025, we may now be past its peak as political constraints tighten ahead of the midterm cycle.
Within EM, local currency fixed income continues to offer selective appreciation potential against the US dollar. Opportunities remain particularly compelling in parts of the high yield universe, notably across Latin America, which faces a pivotal election calendar in 2026. Chile sees an early start with a December 2025 presidential runoff in which right-leaning candidate José Antonio Kast is widely expected to prevail. Although US policymakers have been active elsewhere in the region, Chile has received comparatively limited attention; a Kast victory could reopen discussions around minerals investment and processing partnerships. More broadly, the region appears to be shifting rightward: Peru’s early polls are led by Lima mayor Rafael López Aliaga; in Colombia, outsider candidate Abelardo—who has drawn inspiration from Milei and Bukele—is gaining traction; and in Brazil, it remains to be seen whether São Paulo Governor Tarcísio or a member of the Bolsonaro family will lead the opposition. A move toward the center-right across several key economies could prove a meaningful catalyst for rates and currency performance in the region. While strong returns prevailed across the region in 2025, yields remain quite elevated relative to the rest of local EM (Exhibit 8), setting up for another year of potentially solid returns.
China will be a key swing factor in 2026. With persistent weakness in the property sector, the main question is whether the export channel can continue to shoulder the burden of growth. Recent analysis, including work by Brad Setser at the Council on Foreign Relations, highlights that Chinese exports have risen roughly 40% since the pandemic while imports have been essentially flat. As a result, China’s global trade surplus has continued to widen, raising the question of how long major trading partners will tolerate this trajectory. The broader challenge is whether China can successfully pivot toward a more balanced, domestically driven growth model and lift household consumption as a share of gross domestic product (GDP) back toward its historical highs. A move in that direction potentially will ease China’s deflation, pivoting Asian local currency bond yields higher as central banks’ easing cycles transition to a pause in 2026. The strength of the yuan (CNH) will ultimately be pivotal for low-yielding Asian local currencies. In that respect, it is conceivable that CNH will be on a strengthening path given China’s current account surplus and US dollar conversion from corporates. Under that scenario, selected undervalued Asian currencies could outperform.
Securitized products
Constructive outlook continues
Tracy Chen, CFA, CAIA
Portfolio Manager
Over the quarter, not much changed in the outlook for securitized credit, which remains supported by anticipated monetary easing, solid household balance sheets, peak housing unaffordability, early signs of office real estate stabilization, supportive financial conditions, and favorable market technicals. Both fixed-rate sectors, such as BBB commercial mortgage-backed securities (CMBS), jumbo prime residential MBS, and agency MBS, and floating-rate sectors, including credit risk transfers (CRTs) and collateralized loan obligations (CLOs), have outperformed (Exhibit 9).
Looking ahead to 2026, the backdrop remains constructive. Resilient credit fundamentals, elevated all-in yields, relatively cheap valuations, fading rate volatility, and prospective easing of bank regulations should drive further spread tightening (see Exhibit 10).
Key opportunities include:
- CRTs and RMBS: CRTs offer compelling all-in yields, rapid deleveraging, and potential upside from government-sponsored enterprise (GSE) tenders and reinvestment flows. RMBS performance remains supported by low unemployment and substantial accumulated home equity. We also see opportunities in RMBS, including non-qualified mortgage AAAs, prime jumbo AAA floaters, and CES/HELOC (Close-end second/Home equity line of credit), which offer scalability due to its rapid growth in new issuance.
- CLOs: Credit fundamentals of leveraged loans remain benign with CLO arbitrage economics improving. BBB and BB mezzanine tranches continue to deliver attractive yields with strong credit resilience. Reset/refinancing activity and sustained CLO ETF inflows are reinforcing liquidity and demand. Commercial real estate CLO AAAs also offer great opportunity for potential spread pickup.
- Agency MBS: These screen cheap versus investment grade (IG) corporate credit. The sector is insulated from potential corporate spread widening amid heavy AI-related issuance while incremental demand from GSEs, banks, REITs, and foreign investors provides a positive tailwind for further spread compression.
- CMBS: Tighter underwriting standards, distressed entry valuations, gradual stabilization in the office segment, limited new construction, and high sensitivity to lower rates should support spread tightening, particularly in seasoned conduit and Single-Asset Single-Borrower (SASB) exposures.
- ABS: Data-center and fiber ABS provide access to the strong fundamentals supporting AI-related infrastructure. These deals offer shorter duration, structural protections, IG ratings, scalability, and attractive relative value.
Across the securitized universe, subdued net issuance further strengthens technicals. Taken together, these factors create a compelling opportunity set in structured credit heading into 2026.
Global currencies
Elevated dollar remains vulnerable
Anujeet Sareen, CFA
Portfolio Manager
United States
After a sharp decline in early 2025, the US dollar has drifted higher over the past few months. Negative US policy shocks have subsided, particularly with some of the growth offsets in the reconciliation bill passed earlier this year. Meanwhile, investor enthusiasm around growth opportunities in artificial intelligence (AI) has remained firm, attracting global capital flows into US equities.
Yet at the same time, US interest rates have declined in absolute and relative terms. While US growth bounced in the third quarter, the US labor market visibly softened, catalyzing the Federal Reserve to lower interest rates further. Meanwhile, business surveys outside the US continue to strengthen, notably in Europe. The combination of monetary easing and fiscal easing outside the US supports further improvement in economic activity in the rest of the world through the balance of 2026. As growth differentials narrow between the US and the rest of the world, the dollar is likely to weaken further.
From a longer-term valuation perspective, the dollar is still very elevated in broad trade-weighted terms. It therefore remains vulnerable to a further shift in investor expectations on relative macro fundamentals (Exhibit 11).
It is worth noting that the dollar’s performance since mid-year has not been uniform. The dollar continued to weaken against the Chinese remnimbi and emerging market currencies, notably higher-yielding currencies such as the Brazilian real. Over that same period, the dollar rallied against developed market currencies, particularly the Japanese yen. Ultimately, we expect the dollar to decline on a broad basis into the end of 2026.
In the near term, the US economy is set to benefit from further fiscal stimulus in the first quarter. It is possible that a rise in US yields, perhaps catalyzed by a more hawkish Federal Reserve, temporarily lifts the dollar over the first few months of 2026. However, we think any such rally in the dollar is unlikely to last, as the fiscal support will not extend beyond the first quarter. Meanwhile, the rest of the world will show progress toward stronger growth throughout the year.
Global equities
The biases we bring, the opportunities they create
Sorin Roibu, CFA
Portfolio Manager & Research Analyst
On the surface, investing appears simple, but that is precisely why it is profoundly difficult. Human beings were built for survival, not for outperforming global equity benchmarks. We come preloaded with cognitive shortcuts that can work against us: groupthink, social comparison, fear of missing out, loss aversion, overconfidence, and emotional decision making. Every investor begins at a behavioral deficit, and acknowledging these limitations is the first step in overcoming them.
History provides endless reminders that the largest investment mistakes occur when people become convinced they can forecast the future with precision. Forecasting is the Achilles heel of investing. Most predictions fail, usually at the exact moment consensus becomes strongest. Whether it was the belief that COVID would suppress global activity for years or today’s conviction that artificial intelligence (AI) will reshape society in a straight line, expectations tend to overshoot reality far more often than they match it. Markets do not reward certainty; they reward mispriced expectations.
The current market environment offers a vivid example. In 2024, the US grew to nearly two-thirds of global equity market capitalization, a level not seen in decades. Valuations in large US technology companies embedded perfection while investors extrapolated far into the future both the AI revolution and the idea of US exceptionalism. At the same time, a broad set of global equities in Europe, Japan, Brazil, Indonesia, and even parts of China traded at low expectations despite improving fundamentals and identifiable catalysts.
The early part of 2025 showed how quickly expectations can shift (Exhibit 12). Non-US markets began to outperform, helped by fiscal stimulus, monetary easing outside the US, more attractive valuations, and industry-specific supply and demand imbalances. Commercial aviation shortages, energy underinvestment, and structural bottlenecks are creating opportunities in places that investors have largely ignored.
These imbalances are why our portfolio is positioned toward the unloved, the underowned, and the underpriced. The most compelling opportunities are often where expectations are low and fundamentals have room to surprise on the upside. Today that describes many companies outside the US (Exhibit 13).
As we look ahead to 2026, we see the opportunity set broadening, particularly in regions and sectors where expectations remain muted. Our portfolio continues to carry a significant underweight to the US and meaningful overweights in Europe, the UK, and parts of emerging markets. Many of these markets combine low valuations, improving earnings trends, and supportive policy dynamics.
At the same time, we remain selective around AI. Revolutionary technologies can be life changing and bubble prone at the same time. Railway mania in the 1840s, the dot-com period, and today’s data center buildout all share the same pattern. Our focus is on the broader ecosystem of beneficiaries rather than the narrow group of headline winners.
The lesson for investors is simple. Manage your biases, question consensus, focus on valuations, and think in probabilities. Markets are complex, adaptive systems that constantly shift. The best opportunities often appear where the crowd is least willing to look.
US equities
Market performance may broaden
Patrick S. Kaser, CFA
Portfolio Manager
We are heading into 2026 after a year with starts and stops on momentum and artificial intelligence (AI) stocks as a leading driver of performance. In many ways the setup ahead resembles a year ago: a market with concentrated positions at the top and hopes of AI investment generating future profits. At the same time, however, the risks feel larger as major technology companies face outsize expectations. For example, OpenAI is surrounded by circular financing and frequent press around competitive challenges, and its future success also may drive the outlook for companies ranging from Oracle to NVIDIA.
While politics seems to have dominated 2025, from tariffs to wars, the stock market has mostly shrugged off that noise. However, the year leading up to the midterms is often a year of underperformance, and we believe that political puts and takes will be a larger driver of returns in 2026. With so many political issues on the table, it is hard to point to just one that would dominate, but our view that Democrats are likely to retake the House plus the President’s declining popularity, advanced age, and likely waning influence as he heads toward lame-duck status may cause turbulence if the White House aims to force policies through while it has the chance. This push could provide additional fiscal stimulus, although we also believe businesses may not view policy changes as permanent.
We believe that economic momentum is likely to pick up somewhat, which combined with interest rate cuts, is more likely to cause market performance to broaden out relative to the past few years. This shift should, generally, be good for small- and mid-cap companies and value stocks on a relative basis. The underperformance of low-beta stocks, which now tend to be more in the value universe, may also reverse as investors rotate their exposures.
Index definitions
Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
ICE BofA US High Yield Index tracks the performance of USD-denominated below investment grade corporate debt publicly issued in the major domestic markets.
ICE BAML BB US High Yield Index is a subset of the ICE BAML US High Yield Index, including all securities rated BB1 through BB3, inclusive.
ICE BAML B US High Yield Index is a subset of the ICE BAML US High Yield Index, including all securities rated B1 through B3, inclusive.
ICE BAML CCC & Lower US High Yield Index is a subset of the ICE BAML US High Yield Index, including all securities rated CCC1 or lower.
ICE BAML US Corporate Index tracks the performance of U.S. dollar-denominated investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P, and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule, and a minimum amount outstanding of $250 million.
ICE BAML AAA US Corporate Index, a subset of the ICE BofA US Corporate Master Index tracking the performance of US dollar-denominated investment grade-rated corporate debt publicly issued in the US domestic market. This subset includes all securities with a given investment grade rating AAA.
ICE BAML AA US Corporate Index is a subset of the ICE BAML Corporate Index, including all securities rated AA1 through AA3, inclusive.
ICE BAML A US Corporate Index is a subset of the ICE BAML US Corporate Index, including all securities rated A1 through A3, inclusive.
ICE BAML BBB US Corporate Index is a subset of the ICE BAML US Corporate Index, including all securities rated BBB1 through BBB3, inclusive.
ICE BofA AAA Fixed-Rate US Asset-Backed Securities Index is the AAA-rated subset of the ICE BofA US Fixed-Rate Asset-Backed Securities Index, which tracks the performance of USD-denominated investment-grade fixed-rate asset-backed securities publicly issued in the US domestic market.
ICE BAML US Agency Mortgage-Backed Securities Index tracks the performance of U.S. dollar-denominated fixed rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market.
ICE BofA AAA US Fixed Rate CMBS Index tracks the performance of U.S. dollar-denominated AAA-rated fixed rate commercial mortgage-backed securities publicly issued in the U.S. domestic market.
ICE BofA BBB US Fixed Rate CMBS Index tracks the performance of U.S. dollar-denominated BBB-rated fixed rate commercial mortgage-backed securities publicly issued in the US domestic market.
Morningstar LSTA US Leveraged Loan Total Return Index is a market value-weighted index designed to measure the performance of the US leveraged loan market based upon market weightings, spreads, and interest payments.
S&P 500 Index is a broad measure of US domestic large cap stocks. The 500 stocks in this capitalization-weighted index are chosen based on industry representation, liquidity, and stability.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
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