Fixed Income Forward: March 2026

US markets spent February reassesssing the optimism priced in during January. Investors confronted credible but slowing disinflation, a Federal Reserve (Fed) unwilling to validate near-term easing expectations, and growing scrutiny over the sustainability of earnings growth and AI-related returns. Softer inflation data helped reduce tail risks but failed to restore conviction, while hawkish Fed messaging, private-credit liquidity risk, and sharp sector rotation reinforced the view that policy, growth and valuation outcomes are less certain than markets assumed.

The result was choppy trading, higher dispersion, and a spike in volatility. Non-US markets navigated February with relative ease, and emerging markets continued to show remarkable resilience.

Markets stabilised toward month-end, partially reassured by constructive earnings from Nvidia, but sentiment remained fragile. Credit markets, however, largely held up. Investment grade credit remained resilient, and high yield stayed well supported.

In private credit, Blue Owl Capital’s move to restrict withdrawals from a private debt fund amplified risk-off sentiment and served as a reminder of opacity and liquidity risks inherent in private markets; however, the episode remained contained.

Fourth-quarter US corporate earnings were solid overall though dispersion widened. Aggregate earnings grew at a healthy double-digit pace, driven by mega-cap technology and communication services. Other sectors delivered modest positive growth.

In the US, January’s consumer price index printed 2.4% year-on-year, below the 2.5% consensus and the lowest since mid-2025. January nonfarm payrolls showed continued job growth with only gradual cooling, while wage growth eased. The European Central Bank and Bank of England kept policy rates unchanged, reinforcing a wait-and-see stance. Across the OECD, Australia’s central bank stood out as an outlier, hiking rates by 25 basis points in response to renewed inflation pressure, strong private demand and housing momentum. Overall, most OECD curves now have a flattening bias, reflecting uncertainty over policy timing as growth and inflation prints remain anchored around expectations.

Carry survives; certainty does not. We are in a classic second phase of a bull market: financial conditions remain loose, macro and corporate fundamentals are broadly sound, yet idiosyncratic risks are rising and investors are beginning to ask tougher questions. This remains a benign environment for harvesting carry – total yields are still elevated and systemic risk is low – but certainty has diminished while conviction levels are reassessed. As a result, divergence and dispersion across countries, sectors and capital structures are increasing. This environment favours quality carry, balance-sheet strength and active duration management over broad, directional beta exposure. The market is no longer rewarding indiscriminate risk-taking; it is rewarding selectivity.

There are multiple ways to harvest carry in this regime. One approach is to minimise duration volatility through global floating-rate notes issued by financial institutions and corporates. Floaters continue to offer a liquid, resilient yield pickup over cash and government bonds, with materially lower price volatility during rate swings.

Another approach is to adopt a global, opportunistic multi-sector strategy – pairing government bonds and other interest-rate-sensitive assets with growth-oriented credit exposures within a single, diversified and dynamically managed portfolio. In an environment where carry remains attractive, but conviction is fragile, portfolio construction and active allocation matter more than market direction.

Credit can temper equity volatility. Despite elevated equity volatility, credit markets continue to trade in a historically tight and orderly range, underscoring the stabilising role of credit even as equity sentiment has turned more fragile (see chart).

In our view, corporate bonds, including convertible securities, can play a valuable and complementary role for investors rebalancing after a strong equity run, and where conviction in equity multiples is waning. Historically, high yield bonds have delivered equitylike returns with meaningfully lower volatility. February’s market action provides a timely illustration of this dynamic. For example, Oracle’s share price declined roughly 50% from its September highs, while its benchmark 2030 bond fell by just 2% over the same period. Zoominfo’s share price dropped 42% from January highs, yet its benchmark 2029 bond declined roughly 9%. These divergences highlight how credit can absorb volatility without fully repricing long-term solvency risk. At the index level, global high yield and global investment grade bonds have delivered significantly more stable returns year-todate than the S&P 500 and NASDAQ US equity indices, as well as against the socalled "Magnificent Seven“ of dominant US technology stocks. What is more, global convertible bonds, which encompass both debt and equity features, are outperforming by a wide margin and can be effective in dampening downside volatility without sacrificing equity upside participation.

Be selective, be active. Across our portfolios, exposure to business development companies (BDCs) – a key vehicle for private credit – is deliberately limited. This is a conscious choice rather than a reaction to recent volatility. BDCs remain a small segment yet they carry outsized complexity and asymmetric downside risk.

In credit, there will always be challenged business models that warrant scrutiny, and BDCs require particularly careful differentiation. That said, fundamentals across the broader space remain generally sound, reflected in the predominance of BBB-rated issuers. What matters, however, is not the headline rating but the wide dispersion beneath the surface – across platforms, asset mixes, underwriting discipline and liability structures. Credit quality varies meaningfully, and outcomes will be highly issuer-specific.

As defaults re-enter the headlines, our approach is straightforward: don’t generalise; be specific. We continue to monitor the BDC space closely and keep our powder dry. We are prepared to act should further widening create selective opportunities in highquality names where risk-reward becomes compelling.

Emerging markets and Asia: the sweet spot. The outperformance of emerging market (EM) debt in February reinforced that these markets offer not only diversification, but also resilience. Performance has been supported by a weaker US dollar, easing inflation and improving central-bank credibility across many EM countries.

Local-currency debt continued to lead, while hard-currency debt delivered steady carry with contained spread volatility. Latin America and Africa were among the stronger performers, benefiting from orthodox policy frameworks and attractive carry. Africa, in particular, saw a wave of new issuance pricing at tight levels, though we remain selective in our participation. Oil-exporting countries held up well amid heightened geopolitical noise, while more FX-sensitive markets experienced only brief and contained volatility spikes. That said, valuations across EM are increasingly tight, and indiscriminate risk-taking is unlikely to be rewarded. Our approach remains fundamentalsdriven, with a focus on countryspecific improvement stories, such as Côte d’Ivoire and Kenya, where macro trajectories and policy discipline continue to strengthen.

Asia fixed income delivered quieter but highly resilient performance. Asian credit has been well supported by strong technicals and improving fundamentals, while local markets traded with lower volatility than broader EM, reinforcing Asia’s role as a stabilising allocation within global fixed income portfolios.

1. Renminbi gains ground - The Chinese currency strengthened against the US dollar in February, reaching its strongest level since 2023. Unlike last year, when its moves were largely driven by broad dollar weakness, this episode reflects a more proactive stance, reinforced by strong fixings by China’s central bank. In our view, this points to a meaningful shift in China’s foreign exchange policy, suggesting policymakers are ready to make the renminbi strong again.
2. US bank shares - US bank equities sold off, nearly matching the decline in US software stocks. The move reflects spillover fears from private-credit stress and concerns the AI boom could pressure bank earnings. By contrast, bank credit spreads barely moved. In our view, it is too early to worry about contagion: banks’ exposure to private credit is manageable. Still, these developments bear close watching as late-cycle confidence becomes fragile.
3. US-Iran talks - The US and Iran are holding a third round of talks in Geneva, mediated by Oman, amid a heavy US military buildup in the Gulf region seeking to largely debar Iran from uranium enrichment. Oil prices have hovered around seven-month highs and could spike in the event of a conflict – Iran is OPEC’s third largest crude producer. Energy-related credit and other assets may be a good hedge against geopolitical and re-inflation risks.