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December 2025
Favour a quality bias in 2026
We favour retaining a quality bias in fixed income into 2026 and remain Neutral on overall portfolio duration. In Developed Markets, we prefer Investment Grade over High Yield bonds.
Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited
We expect the fixed income asset class to continue to be supported by carry in 2026. With credit spreads near all-time tights, we see the global macro backdrop and fed funds rates trajectory as key drivers of the credit markets. We do not rule out greater dispersion in the year ahead and prefer to stay with high quality issuers. As the Federal Reserve (Fed) eases, Investment Grade (IG) and selected better quality High Yield (HY) bonds should benefit from still stable fundamentals and lower funding cost. We continue to be Neutral on duration.
US Treasuries
Looking ahead, US Treasuries will remain sensitive to shifting macro signals. Key drivers include the trajectory of US inflation (still above the US Federal Reserve’s target) – alongside a cooling labour market and uneven consumer strength. Fiscal dynamics and elevated issuance needs remain factors that can also affect long-end yields.
We think yields on the 10Y US Treasuries may stay range-bound and we remain Neutral on duration.
Developed Markets
The global economy is likely to continue to face a complex landscape in 2026. The interplay between inflation, labour market, consumption, global capital flows and geoeconomic developments will be key.
As tariff concerns recede, new themes such as rising debt-funded artificial intelligence (AI) CAPEX, greater interconnectedness of public and private credit markets and emerging concerns on spillover risks to the broader financial system from higher bank lending to non-depository financial institutions and increased allocation to private assets by insurers could have an impact on overall credit markets. We believe late credit cycle dynamics warrant avoidance of riskier segments such as subprime, leveraged credits, smaller regional banks, and complex financing structures.
Against this backdrop, we see scope for periodic macro headwinds and credit headlines to create volatility and widen credit spreads. These risks are partially mitigated by corporate fundamentals remaining largely healthy as of now.
Recent credit events in both Emerging Markets (EM) and Developed Markets (DM) serve as reminder of the importance of credit risk as the cycle matures. With DM HY and DM IG yield differential at the lowest tenth percentile of the historical range, we currently do not see DM HY providing adequate compensation for investors to move down the credit curve.
For 2026, we recommend a Neutral positioning on DM IG bonds and an Underweight on DM HY bonds. Focus on quality and thorough analysis of issuer fundamentals should help protect portfolios while laying the groundwork for opportunity.
Emerging Markets Corporates
In 2026, we expect total returns to slow but remain supported by good carry and market technicals. External and domestic developments could bring periods of volatility and/or spread widening but should still present opportunities for selected high quality credits.
Asia
For 2026, we remain Neutral on Asia. Default rates should remain manageable and technicals are likely to stay supportive for Asia in 2026. However, with credit spreads near historical tights, we expect carry rather than compression to remain the key return driver in 2026.
Net bond supply could turn positive in 2026 with lower rates, growing funding needs and potential changes in the Reserve Bank of India’s (RBI) External Commercial Borrowings framework, but demand could stay anchored after years of negative net supply.
Fundamentals for most Asian corporates remain stable and the relatively lower volatility characteristics of Asia IG should still provide investors stable returns over the next 12 months. Within Asia, we reiterate a focus on quality and favour corporates with more resilient balance sheets and diversified cash flow generation.
Emerging Markets Sovereigns
EM Sovereigns remain well-positioned amid a supportive global backdrop. Attractive real yields, loosening financial conditions, and easing inflation trends underpin demand for the asset class, although geopolitical risks warrant continued monitoring.
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