Broad Markets Fixed Income Global Asset Allocation and Outlook
Developed Market Rate/Foreign Currency
(Neutral duration, curve steepeners)
February ended with a sharp geopolitical shock that drove a meaningful flight to quality, reversing earlier rate moves and pushing the U.S. 10-year yield nearly 30bps lower into month-end. Despite the intensity of the move — and a material repricing in energy markets — funding markets and cross-currency basis remained orderly, suggesting markets are adjusting to higher geopolitical risk rather than systemic financial stress. As a result, while volatility has risen, the broader rates regime remains characterized by range-bound dynamics and carry-driven returns.
We maintain a neutral stance on outright U.S. Treasury duration. Our working range for the 10-year remains 3.95–4.25. While elevated oil prices introduce upside inflation risk, structural forces — including fiscal deficits and sustained issuance — continue to support term premia over time. We remain neutral on the U.S. curve, as much of the earlier steepening has repriced and near-term risk-reward appears balanced.
Outside the U.S., we continue to favor selective curve steepeners in Europe, where structural issuance dynamics and more attractive carry and roll profiles offer better relative value than U.S. rates. In Japan, we remain neutral on duration following earlier repricing of normalization expectations.
In inflation-linked markets, we are long U.S. breakevens, as upside risks appear underappreciated following both the recent energy price moves and broader price pressures that remain present (e.g., ISM surveys).
In foreign exchange, we are tactically neutral on the USD. While geopolitical stress has temporarily supported traditional safe-haven flows, we expect USD strength to be episodic rather than structural. We continue to express a positive view on higher-carry EMFX, with positioning primarily in the Brazilian real and selectively in the Mexican peso, where carry remains compelling in a still-benign global funding environment. We use EUR and GBP tactically as funders to avoid volatility in the USD.
Emerging Market Debt
(Overweight)
Emerging market (EM) sovereign and corporate debt remains an attractive opportunity for 2026, even as February’s late-month geopolitical escalation introduced renewed volatility into global markets. While higher oil prices and regional tensions have increased dispersion across countries, broader EM funding conditions have remained orderly, and capital flows have continued to differentiate among issuers rather than retreat indiscriminately. In this environment, carry and income remain central drivers of expected returns.
Lower inflation, elevated real yields, and credible reform momentum across several countries continue to underpin a supportive backdrop. Valuations—particularly in local markets—remain attractive, and many EM currencies are still undervalued relative to the U.S. dollar, reinforcing the case for selective exposure despite episodic safe-haven flows. The recent rise in energy prices may benefit commodity exporters while posing headwinds for energy importers, further increasing cross-country dispersion.
Dispersion across countries remains high, making policy discipline and country selection critical. We continue to favor markets with credible monetary frameworks, improving fundamentals, and attractive real yield differentials versus developed markets, while remaining mindful of geopolitical risks and commodity sensitivity.
Corporate Credit
(Underweight IG, small overweight HY)
Our base case remains constructive for credit, supported by expectations for low but positive growth and correspondingly low default risk. February’s widening — with IG spreads moving 11bps wider to approximately +84bps OAS — has modestly eased valuations, though spreads remain below long-run averages. In our view, current valuations are broadly supported by strong corporate fundamentals and resilient demand for yield.3
Corporate balance sheets remain healthy as we enter a phase where late-cycle behavior is likely to increase, including M&A activity, AI- and infrastructure-related capex, and elevated shareholder distributions. This environment reinforces the importance of sector and security selection. Strong demand for Euro investment grade credit in particular should help cushion the anticipated increase in non-financial issuance tied to M&A and capex over the coming year.
At the same time, geopolitical tensions, U.S. policy uncertainty, above-target U.S. inflation, and rising idiosyncratic news flow — particularly in technology, software, and insurance — temper conviction in meaningful spread tightening from current levels. As a result, while fundamentals remain supportive, we expect carry and security selection to be the primary drivers of return rather than broad-based multiple expansion. Regionally, we continue to prefer Europe over the U.S., supported by more balanced supply dynamics and comparatively supportive policy settings.
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. While spreads are near post-crisis tights, the higher carry, shorter spread duration, and increased issuer dispersion continue to create opportunities for security-level positioning. Recent episodes of idiosyncratic volatility underscore the importance of selectivity, but defaults are expected to rise only modestly and remain contained, supporting ongoing investor demand.
Leveraged Loans
(Underweight)
We expect heavier net supply and rising dispersion in leveraged loans. While 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 (MBS) and non-agency residential mortgage-backed securities (RMBS) remain a high-conviction overweight for 2026. While agency MBS modestly widened following the fading of earlier policy-related headlines, broader securitized spreads were generally steady to tighter through February, demonstrating resilience even as geopolitical volatility increased late in the month. Agency MBS continue to offer 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.
Technical factors remain an important driver of performance. Demand for agency MBS continues to be supported by money manager interest in high-quality collateral with attractive carry, alongside a measured and predictable pace of Federal Reserve balance sheet runoff that has limited net supply pressure. Despite episodic volatility, securitized funding markets have remained orderly, reinforcing the sector’s defensive characteristics within spread products.
Non-agency RMBS continues to offer 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.
Within CMBS, fundamentals remain resilient, particularly in higher-quality segments. Improving sentiment and stable property-level performance support selective opportunities in hospitality, logistics, storage, and high-quality multifamily assets. Dispersion across property types and geographies continues to increase, reinforcing the importance of selectivity and a focus on single asset single borrower (SASB) structures.
We also remain constructive on Danish covered bonds, where defensive characteristics, strong legal frameworks, and attractive USD-hedged yields continue to support relative value.
