Key variables expected to affect fixed income markets in 2026

Markets in 2025 have been broadly complacent, with volatility only picking up briefly following the announcement of trade tariffs by Donald Trump (the so-called “Liberation Day”). This reflected concerns over an economic slowdown, as well as the emergence of the so-called “credit cockroaches” — a term coined by James Dimon, CEO of JPMorgan Chase — referring to defaults within the private credit space. This essentially relates to direct lending that is not traded in public markets and typically does not pass through traditional banking channels, primarily affecting small and mid-sized unlisted companies (Tricolor, First Brands). These episodes proved short-lived and, overall, fixed income continues to benefit from favourable tailwinds: strong demand and ample liquidity (a key supporting factor), subdued volatility, healthy corporate balance sheets, solid earnings, and still-low default rates.

In 2026, there is a high probability of an increase in interest rate yields, alongside a widening of credit spreads (albeit remaining well below historical averages). That said, carry — defined as the accrual of the yield to maturity at the time of purchase — should continue to provide a sufficient buffer against adverse movements in bond prices.

From an interest rate perspective, greater divergence among the main central banks is expected. The current landscape can be summarised as follows: the BoJ is raising rates; the ECB appears comfortable maintaining its current policy stance; and the Fed is set to appoint a new Chair to replace Jerome Powell. At the proposal of Donald Trump, this new leadership is expected to place greater emphasis on lowering interest rates, while seeking a balance that allows the institution to preserve its independence.

The fiscal dimension is becoming the key risk factor: the persistent deficit and the rising cost of debt — with interest payments now approaching 2% of global GDP — are likely to be a key focus for investors. In Europe in particular, record levels of government issuance are expected. However, demand should remain strong, supported by the high level of liquidity currently present in the market.

From a maturity standpoint, the term premium is expected to increase, resulting in a steeper EUR yield curve. Inflation concerns could re-emerge alongside stronger macroeconomic data, compounded by the fact that many countries have yet to present clear and credible fiscal plans. In addition, the reform of the Dutch pension system, which is shifting from a defined-benefit to a defined-contribution model, is expected to trigger the sale of a significant portion of long-dated debt previously held to match defined-benefit liabilities. For context, Dutch pension funds hold approximately EUR 1.6 trillion in assets, around 65% of which are sovereign bonds within the euro area pension fund universe.

In corporate fixed income, valuations are demanding, but this is not currently a reason to reduce exposure, as yields remain attractive and the asset class continues to offer low volatility, supported by strong technical and fundamental factors.

Investment Grade bonds stand out in particular, as we are observing increasing convergence between corporate credit and sovereign debt. Indeed, up to 80 euro area companies currently offer yields below those of French government bonds. In this context, Investment Grade credit is increasingly taking on the role of a new risk-free asset, driven by the abundance of government bonds resulting from the net issuance anticipated in 2026.

The main risks in this area include the end of quantitative easing and a rise in interest rates. Moreover, as we approach the later stages of the cycle, we would expect increased merger and acquisition activity, leveraged buyouts, higher capital investment (particularly in AI) and more shareholder-oriented actions. Such developments would likely drive an increase in issuance and a gradual deterioration in credit metrics, especially among lower-rated issuers and sectors with a strong focus on AI.

Against this backdrop, preserving carry and maintaining credit quality within portfolios should remain the key priority. Accordingly, greater caution is warranted in view of the expected dispersion between Investment Grade and higher-beta fixed income assets (such as High Yield and Emerging Markets), alongside heightened scrutiny of private credit.

_{Date of report: January 7th 2026}