We expect the fixed income asset class to continue to be supported by carry in 2026. With credit spreads at or near all-time tights, we see the global macro backdrop and fed funds rate trajectory as key drivers of credit markets.

Eli Lee
Chief Investment Strategist,
Bank of Singapore

Amidst heightened geopolitical tensions, credit markets have generally remained stable, with spreads narrowing in further from end-2025 levels. Total returns year-to-date were positive across most segments in the asset class despite higher US Treasury (UST) yields.

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. Within Developed Markets (DM), we hold Neutral and Underweight positions in IG and HY bonds respectively, and within Emerging Markets (EM), we are Neutral on Corporates and Underweight on Sovereigns.

We see EMs as diversifiers within global bond portfolios. Although EM spread pick-up over US has tightened significantly over the past year, selective exposure to EM bonds offers diversification opportunities for global investors, especially on the back of rising concerns over weaker USD and fiscal dynamics in major developed economies.

US Treasuries

US Treasuries (USTs) started 2026 on a weaker note, with yields generally higher across the curve year-to-date. The 2Y10Y yield curve steepened by 3bps to 73bps while the 10Y30Y flattened marginally by 4bps to about 63bps during the month.

As widely expected, after reducing interest rates at its three prior meetings, the Federal Open Market Committee (FOMC) kept rates on hold at 3.50%-3.75% in January, though two governors dissented in favour of a 25bps cut. The statement sounded more upbeat on economic activity and the labour market. While the Fed retained its easing bias, some of Powell’s comments were interpreted as pointing to an extended pause.

OCBC Group Research maintains its base case for one 25bps fed funds rate cut in 2026 and has pencilled in this expected cut for 1Q26. Thereafter, any additional fed funds rate cuts will probably require inflation to move nearer to Fed’s 2% target.

Looking ahead, USTs will remain sensitive to shifting macro signals. Key drivers include the trajectory of inflation, labour market and fiscal deficits.

We remain Neutral on portfolio duration. A weighted average portfolio duration of between three to seven years can provide flexibility during varying market conditions. Any downside surprises in macro data or inflation could support duration extension, while stickier inflation, renewed fiscal concerns and a smaller Fed balance sheet may steepen the curve.

Developed Markets

Late credit cycle dynamics and unattractive relative valuation favours DM IG over DM HY. We maintain a Neutral position on DM IG bonds and an Underweight on DM HY bonds. However, heavy bond issuances from hyperscalers to fund rising CAPEX needs, could have a negative spillover impact on DM IG, potentially leading to wider spreads and/or longer duration at the index level. Focus on quality and thorough analysis of issuer fundamentals are critical to protect portfolios while laying the groundwork for opportunity.

Emerging Markets Corporates

EM corporates have outperformed its DM peers year-to-date. In 2026, we expect total returns to slow but remain supported by good carry and market technicals. A softer outlook for the US Dollar against a still-benign macro backdrop should continue to support EM assets. In the near term, we will watch the impact of Kevin Warsh’s Fed chair nomination and volatility in commodity prices.

Asia

Asian credits posted total returns of 0.59% YTD as of 29 January 2026.

Despite comparatively lower yields, Asia’s role as a relatively more defensive play within EMs and strong technicals keep us Neutral in Asia. Carry will be a key support for total returns in 2026. We would look to go down the capital structure of high-quality financials and corporates to pick up yield in Asian credits. We also like select idiosyncratic opportunities in the region.

Indonesia’s sovereign and quasi-sovereign bonds underperformed EM peers YTD, driven by fiscal pressures and macro uncertainties. The risk of a more aggressive fiscal policy has increased, with the 2025 deficit at 2.92% of GDP, above the 2.78% target and close to the 3% cap. Market concerns over Bank Indonesia’s (BI) independence resurfaced after the Deputy Governor nomination, but BI held rates this month and reaffirmed its independence. In 2026, we expect a modest rise in state-owned enterprise (SOE) bond issuance and some fiscal easing, potentially leading to a gradual increase in risk premium.

Emerging Markets Sovereigns

EM sovereigns appear reasonably well positioned for 2026. Real yields remain attractive relative to DM peers, while improving external balances across several large EM economies provide additional buffers. Nonetheless, geopolitical uncertainties − including lingering tensions in Eastern Europe and periodic flare ups in the Middle East − could introduce episodic volatility. Credit differentiation remains essential, as IG spreads appear relatively anchored while distressed and restructuring stories continue to drive index-level moves. We maintain a balanced stance, favouring reform-oriented IG issuers and fundamentally resilient “BB”-rated credits with improving fiscal dynamics.