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Fixed income markets closed the year with a broad repricing of rate expectations, as central bank actions and communication reinforced a more cautious policy outlook. Across developed markets, yields moved higher and curves steepened as investors pushed out expectations for future rate cuts and assigned greater weight to rising term premia. In the U.S., the Federal Reserve delivered a 25 basis point (bp) rate cut, but guidance emphasized data dependence, anchoring front-end yields while higher global yields pushed longer maturities higher. In Europe, the European Central Bank held rates steady but struck a more hawkish tone, driving a near-20 bp sell-off in 10-year Bunds, while policy divergence remained evident elsewhere, including a rate hike by the Bank of Japan and a hawkishly interpreted cut by the Bank of England. In foreign exchange, the U.S. dollar weakened modestly on the month, with the Swedish krona and Canadian dollar outperforming and the Japanese yen lagging.
Despite higher government bond yields, credit markets ended the year on a constructive note. Investment grade (IG) spreads tightened modestly, supported by strong year-end inflows, limited primary issuance, and continued demand for carry, with European credit outperforming the U.S. high yield (HY) posted its strongest month of the fourth quarter, benefiting from improving risk appetite, supportive technicals, and a benign default backdrop, while convertible bonds underperformed amid renewed volatility in crypto-linked equities despite robust primary issuance.
Securitized markets were among the strongest performers in December. Agency Mortgage Backed Securities (MBS) spreads tightened meaningfully as the yield curve steepened and valuations remained attractive relative to other core fixed income sectors. Demand from money managers remained strong, and early signs of stabilization emerged in bank balance sheet participation as the Fed’s balance sheet runoff continued at a measured pace. Issuance across asset-backed securities (ABS), non-agency residential mortgage-backed securities (RMBS), and commercial mortgage-backed securities (CMBS) was steady,1 capping a solid year of supply and reinforcing the sector’s role as a high-carry, shorter-duration alternative within fixed income portfolios.
Asset Performance Year-to-Date
Asset Performance Year-to-Date
DISPLAY 1
Currency Monthly Changes versus USD
Currency Monthly Changes versus USD
DISPLAY 2
Major Monthly Changes in 10-Year Yields and Spreads
Major Monthly Changes in 10-Year Yields and Spreads
DISPLAY 3
Global Asset Allocation and Outlook
Developed Market Rate/Foreign Currency
(Neutral duration, curve steepeners and USD underweight)
Following the recent repricing of dovish expectations, we maintain a neutral duration stance across developed markets, complemented by targeted regional expressions. We remain long duration outside of Japan, with positions in UK gilts, euro area rates, and the Canadian front end. In the U.S., we are neutral on outright Treasury duration and continue to express our views through curve steepeners. We also hold steepeners in Germany and France, primarily in the 5s–30s and 10s–30s segments, reflecting our expectation that term premia will continue to rise alongside persistent fiscal deficits and higher-for-longer issuance dynamics. Steepening structures in the U.S., UK, and Australia offer attractive risk-reward in an environment where carry is likely to remain the dominant driver of returns.
We remain short Japanese duration, reflecting rising term premia and expectations for further policy normalization by the Bank of Japan, though we have reduced the position as valuations have become more attractive. In inflation-linked markets, we took profits on long Japanese breakevens while maintaining a constructive stance on U.S. Treasury Inflation-Protected Securities (TIPS).
In foreign exchange, we increased exposure to a basket of higher-beta currencies versus the U.S. dollar, reintroducing the New Zealand dollar and rotating from the Hungarian forint into the Polish zloty based on relative central bank dynamics. Looking into 2026, currency opportunities are becoming increasingly compelling. The U.S. dollar remains overvalued by historical standards, and we expect gradual depreciation as Fed easing progresses and global capital flows rebalance. This backdrop supports selective exposure to high-carry currencies and those underpinned by improving growth fundamentals, while remaining mindful of policy and geopolitical risks.
Emerging Market Debt
(Overweight)
Emerging market (EM) sovereign and corporate debt remains a standout opportunity for 2026. Lower inflation, elevated real yields, and credible reform momentum across several countries underpin a supportive macro backdrop. Valuations—particularly in local markets—remain attractive, and many EM currencies are undervalued relative to the U.S. dollar. While the opportunity set is broad, dispersion is high, making country selection and policy discipline critical. We favor markets with credible monetary frameworks, improving fundamentals, and attractive real yield differentials versus developed markets.
Corporate Credit
(Underweight IG, small overweight HY)
We remain underweight investment grade credit, reflecting tight valuations, weakening technicals, and peaking fundamentals. While IG balance sheets remain healthy—characterized by strong liquidity, low downgrade risk, and conservative leverage—spreads are tight by historical standards, leaving little margin for error. Elevated issuance of long-dated debt to fund AI-related capital expenditure, alongside an active M&A pipeline, further challenges the technical backdrop. At current levels, modest spread widening could materially erode excess carry.
Regionally, we prefer Europe over the U.S., supported by more balanced supply dynamics. From a sector perspective, we favor financials—particularly banks—given strong capital positions, resilient earnings, and limited net supply. We are underweight single-A non-financials, where M&A risk is more acute.
We maintain a modest overweight to select high-yield issuers in both the U.S. and Europe. Fundamentals remain supportive, with improved average credit quality, low default rates, and manageable leverage. Although spreads are near post-crisis lows, the higher yield carry, shorter spread duration, and greater issuer dispersion create attractive opportunities for security selection. Defaults are expected to rise modestly but remain contained, supporting continued investor demand.
Leveraged Loans
(Underweight)
We expect heavier net supply and rising dispersion in leveraged loans. While Collateralized Loan Obligation (CLO) demand remains a key technical support, economically sensitive sectors are showing signs of strain, contrasting with strength in software and technology-linked issuers. Given expectations for Fed rate cuts, we prefer fixed-rate exposure over floating-rate assets and remain underweight the asset class.
Securitized Products
(Overweight)
Agency mortgage-backed securities and non-agency residential mortgage-backed securities remain our highest-conviction overweight for 2026. Our overweight to agency MBS delivered strong absolute, excess, and relative returns in 2025, supported by a bull steepening of the yield curve, a compression in implied volatility to post-2021 lows, and a gradual but persistent improvement in market technicals. Looking ahead, we believe agency MBS continue to offer an attractive spread pickup relative to both historical levels and other core fixed income sectors, providing compelling relative value versus investment grade corporates and cash alternatives.
We expect demand for agency MBS to strengthen further as regulatory constraints ease, short-term rates decline, and bank balance sheets become more flexible. In addition, money managers remain attracted to the sector’s combination of carry and high-quality collateral. The Federal Reserve’s supportive policy stance, alongside the continued but measured runoff of Fed-held MBS, should provide an additional tailwind by limiting supply pressure and supporting market liquidity.
Non-agency RMBS also offers an attractive opportunity set, underpinned by stable home prices, low loan-to-value ratios, and historically low delinquency rates. Supply-demand dynamics remain favorable, with limited new issuance and minimal refinancing risk given the high proportion of borrowers locked into low mortgage rates. These factors, combined with the slow unwind of Fed-held positions, continue to support the sector’s resilient credit profile.
Within CMBS, fundamentals remain resilient, particularly in higher-quality segments. We see attractive opportunities in hospitality—especially luxury and trophy properties—where demand trends and cash flows have stabilized. Office CMBS also presents selective value, supported by improving occupancy rates and a more stable interest rate environment. We continue to favor exposure to logistics, storage, and high-quality multifamily assets, where operating performance remains robust. While CMBS remains a high-conviction allocation, dispersion across property types and geographies is increasing, making selectivity critical. Our exposure is therefore focused on the single-asset, single-borrower (SASB) market, which allows for greater transparency and control over underlying cash flows.
Lastly, we remain constructive on Danish covered bonds. The market’s depth, strong legal framework, and backing by a politically stable economy and resilient housing market support its defensive characteristics. Valuations remain compelling for high-quality assets, and the steep Danish government curve continues to offer attractive USD-hedged yields for global investors.
1 Source: Bloomberg, as of December 31, 2025
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