The strategic power of security-selection alpha

In our view, fixed income expected returns are lining up to be quite decent in 2026 but are no longer remarkable, primarily because the 'Goldilocks' macro regime is over. Indeed, the current macro and market environment is less supportive of fixed income, in large part due to a more complicated duration landscape and a challenging spread valuation backdrop.

In many parts of the world, central banks are no longer easing. Even in the US, the bar is fairly high for the Fed to deliver more cuts than are currently priced in by the rates market. In the absence of aggressive policy easing, duration is therefore unlikely to be a major contributor to total returns. In addition, credit spreads are tight in many markets.

As a result, we believe that there is limited space for further spread compression, though we are not necessarily calling for a spread correction in the period ahead. In fact, our baseline scenario calls for stable spreads, helped by a robust macro backdrop and solid credit fundamentals, though we do not expect this alone to drive total returns.

This leaves us with income as a main driver of global fixed income returns, supported by total yields that remain attractive by historical standards. Looking at the Bloomberg Global Aggregate Index (Global Agg), its yield is currently around 3.45%, producing a 10-year z-score of 1.05 in our valuation analysis-a level that is quite attractive relative to history.

From a portfolio-construction perspective, this shift matters because the 'easy' sources of beta are becoming less reliable at the margin. When policy rates are no longer trending steadily lower, the distribution of outcomes for duration widens and rate volatility can potentially rise. Indeed, modest changes in inflation momentum, fiscal expectations, or term premium can translate into meaningful rate moves. At the same time, when spreads are already tight, carry remains appealing but the cushion against idiosyncratic shocks is thinner, making downside asymmetry more relevant.

This combination tends to reward disciplined risk budgeting and careful security selection prioritising bonds where investors are being paid for specific, identifiable risks (liquidity, structure, sector, or issuer fundamentals) rather than relying on broad market repricing. Put differently, as macro uncertainty rises and valuations look less forgiving, the value of being selective increases because small differences in entry point, credit quality, and balance-sheet resilience can have an outsized impact on realised returns."