Markets vs. macro: Follow the fundamentals in fixed income

Fixed-income investors should stay invested in credit, favouring higher-quality issuers and moderate duration despite geopolitical and inflation risks.

• Brent crude at around $80-90 per barrel remains absorbable by the global economy, but prices sustained closer to $120 would create significant economic damage; 2026 growth is projected at 2.1% in the US and near 1% in the UK and Eurozone.
• The US added 162,000 jobs in August, while the inflation shock has been driven mainly by energy rather than the broad-based second-round effects seen in 2022; the Fed nevertheless raised rates last month.
• Political uncertainty is increasing risk premiums, but Italy's government has become the country's longest-serving since World War II, supporting tighter spreads; the authors prefer Bunds to US Treasuries because US debt and inflation dynamics are less favourable.
• Hyperscaler bond issuance is expected to reach a record $250bn in 2026, with the concentration of supply at the long end contributing to higher 30-year Treasury yields and creating selective relative-value opportunities in strong cloud businesses.
• European banks have CET1 ratios around 16%, non-performing loans around 2%, and nearly 40% of AT1 debt is now majority investment-grade rated versus about 20% in 2019; these fundamentals support tight spreads and continued outperformance by subordinated financials.

Takeaway: The authors see higher yields as improving the fixed-income opportunity set and recommend an overweight to corporate credit, especially higher-quality names with moderate duration, while maintaining selectivity across sovereigns and vigilance toward energy, politics and AI-related leverage.