Fixed Income Quarterly Strategy - October 2026

European fixed income offers improved income and diversification, but tighter financial conditions make duration, issuer quality and geographical selection increasingly important.

• Resilient activity and renewed inflationary pressure led the ECB and Federal Reserve to maintain restrictive policies, with both central banks raising rates by 25 basis points.
• Higher long-term yields are tightening financial conditions, while high-quality sovereign bonds are gradually regaining their diversification role and offering more income.
• French fiscal concerns pushed the OAT-Bund spread to 127 basis points at the end of September, without materially weakening French corporate credit fundamentals.
• European Investment Grade yields are around 4.3%, and the authors favour selected BBB issuers for their balance of yield and credit quality.
• High Yield yields are around 6.8%, but tighter financing conditions are increasing dispersion and favouring issuers with strong fundamentals, recurring cash flows and manageable leverage.

Takeaway: The team is gradually extending duration, prioritising Investment Grade and selected BBB issuers, remaining selective in High Yield and limiting French exposure because of persistent sovereign risk.