Payden & Rygel: Global Fixed Income Outlook 2026

December 1, 2025

Key takeaways

• Bonds are expected to benefit from a resilient global economy, moderating inflation, and easier monetary conditions.
• In the US, inflation is expected to decline toward the Fed’s 2% target, creating a stable backdrop for duration assets.
• Our outlook warrants a balanced and diversified distribution of risks across credit and duration with a focus on quality and liquidity.We think 2026 can offer a greater level of divergence between global rate markets, offering interesting relative value opportunities, including in the US and UK.
• We also find value in select emerging market opportunities where steep curves screen as attractive against forward economic prospects.
• An unappreciated risk, government budget deficits remain alarming, evolving in an environment more akin to periods of recession rather than trend growth.

After posting a strong year for bonds in 2025, what is your outlook for 2026?

We expect 2026 to remain constructive for fixed income as bonds should benefit from a resilient global economy, moderating inflation and easier monetary conditions. The combination of elevated yields and potential decline in yields (driven by lower Central Bank rates and moderating inflation) should support fixed income total returns.

Central to our outlook for fixed income is our view on inflation which we think will moderate further next year. In the US, we expect inflation to decline toward the Fed’s 2% target as tariff effects fade and services inflation gradually softens, creating a more stable backdrop for duration assets. We expect the Fed to continue lowering policy rates toward neutral, or below in a case of a recession, helping yields drift lower and bolstering total returns.

In our central case, credit should remain resilient with carry likely to be the primary source of excess returns. Robust credit fundamentals, low defaults rates and favourable technicals should continue to support credit markets. Although rich valuations in credit will limit the potential for additional excess returns.

We view recent headlines around cracks in certain parts of private and public markets as idiosyncratic in nature and see the risk of contagion to broader credit markets as low. In a slowing economy scenario, while duration would perform strongly, credit excess returns would likely turn negative.

Having said this, uncertainty remains elevated and the binary nature of our outlook warrants a balanced and diversified distribution of risks across credit and duration with a focus on quality and liquidity.

Where do you see value as we look ahead to 2026?

We think 2026 can offer a greater level of divergence between global rate markets, offering interesting relative value opportunities. Notable, we see potential in the US and UK for rates to move lower in the front end to the belly of the curve, especially if more benign economic outcomes prevail. We also find value in select emerging market opportunities where steep curves screen as attractive against forward economic prospects.

We believe credit markets are largely pricing in benign economic outcomes and room for tighter spreads is limited in 2026. However, we realise that moderate global growth could allow spreads to stay around these levels for the foreseeable future.

Within corporates, we have a slight bias for European exposure and prefer to limit exposure to US consumer names. While U.S. growth remains supported in part by continued investment in Artificial Intelligence, we are mindful of evolving labour-market dynamics as well as of the high sensitivity of our outlook to continued investment spending.

In contrast, Europe appears to offer a relatively steadier backdrop at present, helped by increased government spending and a generally more measured policy environment. We see compelling relative value in some new structures in the non-agency residential mortgage market as they offer strong credit metrics and healthy spread premiums.

What are the key macro forces shaping your outlook for 2026, and how are they influencing your current positioning?

Our outlook can be characterised as somewhat optimistic with risks titled to the downside. The U.S. economy remains central to our global outlook in 2026. We think the current divergence between strong GDP growth and weakening labour markets in the U.S. is unusual and unlikely to persist in 2026.

In our view, the US economy sits on a binary path: either re-accelerating through tech-driven productivity gains or slipping into recession as labour market softness feeds through to broader activity.

Regardless of the outcome, U.S. inflation is on track to moderate, and this disinflationary trajectory combined with softness in the labour market should allow the Fed to continue easing at least to neutral if not more.

Outside the US, most developed economies are expected to remain resilient, with benign economic growth, declining inflation and monetary conditions staying loose or even loosening further, aside from Japan where gradual tightening is likely to continue.

Moderating inflation and rangebound inflation expectations should be consistent with negative correlations between interest rates and risk assets. With risks to growth titled to the downside, we think a balanced and diversified allocation between duration and credit risks sets portfolios in a good position to navigate the uncertainty and range of potential outcomes in 2026.

If you look back at 2025, what surprised you?

Looking back at 2025, several developments were surprising.

Inflation stayed stickier than expected in various developed economies. In the U.S., this was primarily due to tariff-driven goods-price distortions, which kept year-over-year readings elevated even as services inflation behaved as projected. While in the U.K. a combination of wage growth pressures, higher government-administered prices, trade cost pressures contributed to a stickier inflation.

US labour-market dynamics surprised us as we did not expect the decline in the labour force participation rate. As a result, while the labour market did weaken as we expected, the rise in the unemployment rate was slower than we initially anticipated.

On the market side, in the U.S., short-duration assets underperformed relative to our expectations as the Fed cut less than we anticipated. However, we did see an underperformance from longer dated bonds in most other developed markets as we expected, with fiscal pressures leading to steeper yield curves.

The U.S. dollar weakened more than expected, driven not by structural shifts but by falling growth and narrowing interest rate differentials.

Equity markets proved remarkably resilient, recovering rapidly from an early-year drawdown. What stood out most was the scale and speed of AI-driven private-sector investment, which became a major offset to tariff-related growth headwinds.

Overall, 2025 underscored how policy shocks, labor-force shifts, and technology investment reshaped both the economy and markets in unforeseen ways.

What risks are not being fully appreciated by the market as we approach 2026 and how are positioning your portfolio?  

Government budget deficits remain alarming, evolving in an environment more akin to periods of recession rather than trend growth.

The following 12 months brings further fiscal impulse from major global sovereign nations, with the US, Germany and Japan likely all front-loading fiscal packages. While at the same time, the AI tech boom has morphed into the next phase, with estimates of AI capex funded by debt issuance accelerating dramatically and topping $600bn in 2026.

We have rarely seen such an impetus to issue debt on this scale globally and in an era where global central bank balance sheets are unlikely to be expanding and taking down net supply. We wonder whether the market adequately appreciates the upside risks to growth and term premia in 2026.