Market Insights at a Glance
In 2026, global fixed-income markets should benefit from improving growth, subdued inflation and reduced uncertainty around tariffs. Inflation is broadly at target and central banks overall are nearing rate-cut cycle ends. We currently favor high-quality spread sectors for building consistent income and are positioned to take advantage of credit opportunities in AI-related issuance, M&A activity, commercial MBS and CLOs.
This summary is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard.*
Growth
Convictions
- US growth should stay at or above trend, supported by rate cuts, fiscal stimulus and real wage gains.
- Eurozone growth should start to gain traction from German fiscal loosening.
- China slows to ~4.5% amid property woes, while EM benefits from central bank easing.
Rationale
Inflation
Convictions
- Global inflation continues trending lower, remaining contained across most developed market (DM) economies.
- US may see tariff-driven goods price increases, but services disinflation persists on lower housing and labor costs.
- Eurozone inflation is contained as labor costs ease; UK underlying inflationary pressures continue to ease, while China faces very subdued pressures.
Rationale
Rates
Convictions
- Major central banks have eased policy on disinflation and softer labor markets; the Fed cut 75 bps and the ECB lowered rates to 2%, supporting risk assets.
- Further cuts are expected from the Fed and BoE, while the BoJ tightens as real rates remain negative.
- DM easing has enabled emerging market (EM) rate cuts, with attractive real yields favoring long duration in local markets.
Rationale
Monetary Policy
Convictions
- Further Fed rate cuts are dependent on labor and inflation data. Additional BoE rate cuts are expected, while the BoJ tightens as real rates remain negative.
- EM central banks have scope to cut rates further as inflation continues to decline, supporting growth and global monetary conditions.
Rationale
Credit Markets
Convictions
- Credit spreads are tight but supported by strong corporate and household fundamentals, justifying positioning in spread sectors for consistent income.
- Elevated M&A activity driven by deregulation presents mixed risks for investment-grade credit as companies use more debt than equity to finance deals.
- Opportunities exist in AI-driven capital needs, high-yield credit, collateralized loan obligation (CLO) tranches and commercial mortgage-backed securities (CMBS) with improving quality.
Rationale
Labor
Convictions
- US unemployment has risen, but reflects new entrants and re-entrants rather than layoffs; labor supply remains tight due to flat migration.
- Eurozone unemployment hit a record low but is rising in Germany amid industrial threats and in France.
- Japan’s labor shortages sustain higher wages, domestic inflation and strong capital spending despite slower growth.
Rationale
*As of 31 Dec 25.
Fixed-Income Overview and Outlook: Growth, Disinflation and Easing Support Risk Assets
The global fixed-income landscape in 2026 is one of improving growth, continued disinflation and central bank easing that has reduced recession fears while supporting risk assets. Major central banks including the Fed, ECB and BoE have cut rates in response to softening labor markets and declining inflation. Inflation is trending toward central bank targets globally, though the US may see short-term upward pressure from tariff-related costs offset by ongoing services disinflation.
Looking ahead, we expect US yields to remain range-bound with steeper curves, while front-end yields drift modestly lower. Our investment focus centers seeking to generate consistent and reliable income through high-quality spread sectors despite tight valuations that are supported by strong corporate and household fundamentals. Significant opportunities exist in AI-driven capital raising, where high-quality issuers will tap public markets for speed of execution, alongside selective exposure to elevated M&A activity, CLO tranches and improving commercial real estate. EM local rates remain attractive given supportive real yields and central bank coordination.
Geopolitics at the Core: Venezuela’s Transition and EM Resilience
EM countries are starting 2026 with a mix of promise and complexity. Recent geopolitical developments, particularly in Venezuela, have added uncertainty to the global landscape, but the underlying case for EM strength remains compelling. As noted in our recent EM outlook, economic growth across the EM world has continued to outpace that of DM economies, supported by disinflation trends, elevated real interest rates and disciplined monetary policy. We believe these factors, combined with improved fiscal positions and robust reserves, create a foundation for resilience.
From a technical perspective, EM assets benefit from low crossover participation and strong IMF-backed programs in frontier markets. While hard-currency returns are likely to lean more on carry than further spread compression, selective opportunities persist—especially among investment-grade sovereigns where fundamentals support incremental tightening.
Latin America illustrates the nuanced risk/reward dynamic. Venezuela’s bond rally reflects optimism around political transition and debt restructuring, though any resolution is likely to require a multi-year process. Elsewhere, Colombia faces heightened political noise ahead of elections, while Mexico and Brazil maintain relatively stable trajectories. Brazil in particular continues to warrant tactical overweight positioning despite election-related uncertainty.
Beyond the region, reform-driven economies such as Nigeria and Egypt showcase the upside of structural improvements, while rising stars like Costa Rica and Ivory Coast offer long-term potential. EM corporates remain attractive for incremental spread and carry, particularly in sectors like mining & metals, utilities and energy.
In currencies, EM FX valuations stand out as deeply discounted on a real effective basis, contrasting with an expensive US dollar. Higher real rates, undervaluation and even modest portfolio diversification flows could drive meaningful outperformance without requiring a dollar reversal.
Overall, EM fundamentals are stronger than in prior cycles, supported by supply-chain diversification and favorable terms of trade. Against this backdrop, we maintain a constructive stance on EM local markets, emphasizing selective opportunities while actively managing geopolitical and idiosyncratic risks.
Even with ongoing policy easing, inflation is declining faster than interest rates. This leaves EM real yields elevated and preserving the carry advantage, offering compelling real income opportunities despite rate cuts.
Western Asset Investment Themes
| Asset Class | Our View |
|---|---|
| Corporate Credit | We are gradually reducing exposure to corporate credit due to tight valuations, but strong fundamentals persist. Anticipated supply from AI-driven infrastructure and elevated M&A activity may create attractive opportunities to add high-quality credit. |
| Investment-Grade Credit | A wave of new issuance is expected as companies raise capital for AI-related infrastructure, with high-quality issuers likely to offer attractive rates in 2026. |
| High-Yield Credit | Fundamentals remain strong, with new issuance primarily used for refinancing rather than aggressive expansion. M&A activity is generally positive, as acquired companies tend to be upgraded in quality. |
| Private Credit | Leverage is higher than in public credit, but remains manageable and below prior peaks. |
| Structured Products | CLOs and select tranches offer attractive relative value, and we believe agency MBS can be used as effective portfolio hedges. Commercial real estate may be the most compelling opportunity at this time, with prices rebounding and spreads remaining wide relative to corporate credit. |
| Emerging Markets | High real yields and supportive local-rate environments encourage long positions in EM debt, with active issue selection favored in high-beta and frontier markets. |
