Fixed Income Forward: June 2026

The investment environment has shifted. We are now in an inflationary world with rising yields. This trend is further reinforced by developments in China. After 33 consecutive months of producer price index (PPI) deflation, April’s +2.8% print (up from -2.4% in October 2025) marks an inflection point that is nothing short of a regime shift. China has long acted as a global disinflationary anchor. That anchor may now be weakening, alongside an appreciating renminbi, adding to global inflationary pressures.

Rising yields are affecting countries and sectors unevenly. In the US, growth remains resilient, underpinned by strong corporate earnings, robust AI-driven capex, and an expanding fiscal deficit. As the earnings season concludes, companies in the S&P 500 index have delivered year-on-year earnings growth of more than 25% – the fastest pace in three years. Performance has been more broad-based than expected and sector-level return on invested capital (ROIC) remains sufficiently high to absorb higher funding costs.

The key question for the US is durability of such resilience. While AI-related investment continues at full speed with little sign of fatigue, non-AI capex remains subdued at just 1.5% of total spending. Broader investment seems constrained by structural factors – ie, labour supply – which dampen incentives to expand. This raises a vulnerability: if AI capex were to slow, it could reveal a materially weaker underlying growth trajectory for the US economy.

Beyond the US, demand-side risks look underappreciated, with data from Europe and Asia pointing to rising inflation and weak growth. While adjustments so far have been orderly, we note that the Iran conflict only affected the final month of the first quarter. Euro zone leading indicators point to more pronounced slowdowns in the second and third quarters of the year. And companies in Europe and most Asian countries do not have as high ROIC as US firms to absorb much higher interest rates.

Central bank policy divergence should remain the dominant theme. In the US, the new Federal Reserve (Fed) chair must navigate competing forces – rising inflation, AI-induced productivity gains and a K-shaped economy. Caution and policy inertia are likely the prudent approach. But if the energy shock feeds into core inflation and inflation expectations, the Fed’s ability to look through these pressures will be limited. In contrast, a rate hike by the European Central Bank (ECB) this month is fully priced in. The question is whether it represents a one-off recalibration to the energy shock or the start of broader tightening. We see it as the former for now, with the ECB remaining firmly data-dependent.

We continue to prefer a shorter duration bias across portfolios and stay invested in high-quality corporate credit and other spread assets for their higher coupon income (“carry”). Despite compressed credit spreads and ongoing noise around private debt, we expect credit to outperform core rates in the months ahead, thanks to the compounding power of carry and demand for income. Credit fundamentals remain solid, evidenced by strong earnings and healthy balance sheets. We are moderating our bearish stance on the US dollar, as relative growth dynamics and firmer commodity prices should provide near-term support, but maintain a structurally weaker outlook on the currency given rich valuations.

In an inflationary environment, we believe having exposure to countries, currencies and securities that benefit from higher commodity prices should provide a more effective hedge for growth-oriented portfolios than core rates. Overall, a genuinely global portfolio can exploit opportunities across economic and credit cycles, mitigating geographic and sector concentration risks while maximising diversification of income sources.