Monthly Bond Commentary - September 2026

The investment outlook for fixed income - specifically rates - could well be turbulent in the short-term, however, we are highly constructive over a longer time frame. There are a number of catalysts including US mid-term elections, sovereign debt worries in Europe and higher oil prices to navigate over the coming months which could inject volatility into the market. These risks are capturing prime space on the front page and turning a spotlight on fixed income which is rarely there.

That being said, these risks are all macro/rates related meanwhile credit fundamentals remain strong. We are seeing improvements in index quality for both IG and HY markets as proxied by average credit rating at a time of low default rates. This strong backdrop has enabled spreads to rally in to historically tight levels notwithstanding spread widening in recent weeks.

Our view is that spreads have been tighter than fair value and recent moves are a positive development. The cause of such tight spreads is supported by generationally high yields pulling indiscriminate buyers into the market willing to buy at any spread so long as yield targets are hit. The unwinding of spreads will have a positive impact over the medium-term and ensure adequate compensation for investors.

Our aim is to have the portfolios prepared for a decompression scenario whilst generating steady excess returns in the short-term. When credit markets sell off lower-rated bonds will widen more than those higher rated; for example AT1s versus senior financials or BBs compared to As. Buying these more volatile assets at a moment of market weakness enables excess returns over the cycle. Whilst we cannot time the market perfectly we see a growing number of catalysts which has prompted us to gradually reposition the portfolio.

One final point to make regarding asset allocation and medium-term outlook is the comparison of bond yields versus dividend yields. The spread between our benchmark yield to worst (YTW) and the dividend yield on the S&P 500 has hit highs last seen in the 2008 financial crash. This time the drivers are different and do not signal distress but yields are higher as a structural feature of the higher rates environment. Meanwhile, equity valuations are at all time highs and driven by the most concentrated theme since the railroad boom in the late 19th century. In other words credit offers equity like returns for fixed income risk.