Fixed income markets are evolving rapidly, and understanding the forces shaping them is critical for investors. Here, Partner Neil Hohmann, Ph.D., highlights five key fixed income trends we’re watching in 2026, covering credit cycles, yield opportunities, policy uncertainty, and private credit dynamics.
Where do you think we are in the “credit cycle?” What do you think are the critical factors for performing through this segment of the cycle?
Credit cycles are generally the convolution of multiple types of market waves, particularly credit and liquidity movements. One can argue we’re toward the tail end of both (they are frequently correlated).
For credit, weakening jobs numbers, plateauing corporate earnings, persistent inflation, and unclear Federal Reserve direction suggest investment grade and high-yield credit may weaken from today’s levels. Fixed income investors are more cautious and selective in this weakening macroeconomic environment, widening spreads and lifting volatility.
To help insure our clients against developing cycles, we diligently follow our tested investment process – owning only credits durable to the worst macros and industry distress we can anticipate and buying only at attractive valuations that give us a hefty margin of safety1 in income against potential market price declines.
Where can investors seek higher yields with a relatively high degree of safety?
As a medium-sized manager, we can invest meaningfully in credits for investors that may have less issuance, are less familiar to markets, and may be experiencing substantial issuance growth. These favorable technicals for investors provide us consistent opportunities for value in sectors like structured credit (such as asset-backed securities [ABS], commercial mortgage-backed securities [CMBS], and collateralized loan obligations [CLOs]) and less-frequented corporate credit sectors (such as business development companies [BDCs], insurers, and Yankee banks). In smaller or overlooked credit sectors, our investors may simply benefit from the absence of the large fixed income managers.
How do you see policy uncertainties affecting fixed income markets?
We are in a period of greater policy uncertainty than we have been in some time – on rates, inflation, trade, immigration, and geopolitics. Yet the added uncertainty does not appear to be priced into the relatively low compensation available today in bond and loan markets. That just underscores the importance of defensive investing and process diligence. Our bottom-up process has organical¬ly resulted today in a greater-than-typical level of cash and reserves and a shorter credit duration profile across portfolios, both of which position us well to take advantage of the elevated risk of turbulence in these markets.
What are you most excited about in this space as we kick off the year?
We’re excited about the continuing general availability of opportunities in these more overlooked segments (specifically, nontraditional ABS and CMBS, insurance, BDC, and loans).
Our tried-and-true investment process has allowed us to organically build reserves and shorten credit tenures to position us to take advantage of market turbulence. We expect more frequent episodes of market volatility that our process exploits and that have delivered competitive performance for investors in the past.
How should investors navigate the actual and headline risks associated with private credit?
This is straightforward. Invest with long-seasoned private credit managers that have stuck to their underwriting standards and not altered their business models to accommodate newer market structures and outsized growth.
In addition, invest in private credit fixed income structures that allow investors to take advantage of the substantial compensation opportunities but also help investors avoid direct losses in owning private credit outright. For example, BBH has historically been the most prevalent investor in unsecured corporate bonds of BDCs, which exhibit minimal debt leverage (about 1x) vs. the finance sector and where, based on our experience, no lender – bond or bank – has ever lost money over the 40-year history of the market. Nonetheless, rating for rating, they exhibit among the most attractive compensation we see in the investment grade bond market. We liken this to selling “pickaxes to the gold miners.”
