Government Bonds:
Government bonds delivered solid returns in 2025, thanks to high starting yields and steadier rate expectations. In 2026, policy rates, are set to converge, with the US and UK easing, Japan tightening gradually, and Europe remaining relatively stable. Yield curves have steepened as term premia normalise, and while positive real yields improve return prospects, inflation and fiscal risks could still drive volatility. Overall, government bonds now offer better value and useful diversification, but a mix of regions and maturities remain important.
Corporate Bonds:
Corporate bond yields edged lower in 2025 as rates fell and spreads tightened, led by the U.S. dollar market, while European investment grade finished broadly unchanged. In the U.S. companies with strong fundamentals should be able to maintain healthy margins, supported by AI-driven efficiencies and reduced leverage, with debt servicing costs now easing.
Defaults are expected to stay contained into 2026, but risks remain. Ultra-tight spreads, slowing growth, tricky monetary policy decisions and external pressures such as tariff uncertainty could still challenge credit markets.
