It has been a tough environment for fixed income managers since the start of the year. Increasingly, flexibility matters.
- Duration decisions have been complicated by the war in Iran and the revival of inflationary pressures
- There have been the worries around the new Federal Reserve chair
- Hyperscaler issuance has created a new dynamic in the corporate bond market
Stock markets may have been volatile in 2026, but the overall trajectory has been higher and most areas are sitting on gains for the year to date. The same cannot be said for fixed income, where fund managers have had to be increasingly careful about their decision-making on countries, sectors and duration.
Duration decisions have been complicated by the war in Iran and the revival of inflationary pressures. Assumptions around interest rate cuts had to be significantly revised in March, and inflation data continues to wrong-foot policymakers and make decisions difficult. There remains considerable debate on if and when the Federal Reserve will raise rates, and by how much.
The new Federal Reserve chair has also brought concerns. At a fragile moment for fixed income markets, introducing a new communications strategy for the market was bold at best, ill-advised at worst. There have been concerns that Chair Warsh is not prepared to take the necessary decisions to curb inflation in the long term, which has pushed up long-dated bond yields in the US. Other developed markets have been caught in the cross hairs.
There have also been complexities around Japanese government bond and currency markets that have threatened to spill over into other markets. The US treasury has been sufficiently worried about the trajectory of the yen to intervene in the market. There are still concerns that rising Japanese government bond yields may prompt a full-scale repatriation of capital away from the Treasury market. Japan remains the largest foreign owner of treasuries.
The corporate bond market hasn’t been a breeze either. Aggregate bond spreads have started to rise since June. They have some way to go before they reach worrying levels, but there are concerns about the impact of hyperscaler debt on the market. It has proved volatile, particularly names such as SpaceX. It introduces a new element that needs to be managed.
A recent survey from Nedgroup found that fixed income managers identified geopolitical instability and energy price volatility as their top concern (45%), with concerns over government issuance (44%) and persistent inflation and interest rate volatility (42%) also significant worries. They were also worried about heavy corporate issuance from AI-driven capital spending (29%) and credit deterioration (32%).
It’s a difficult time to be a bond manager. Those with the most flexible mandates can find places to hide. They can make the most of high yields, while managing risk. However, undifferentiated exposure to fixed income in this febrile climate looks like a risky option.
