Pay attention to fixed income in 2026, say fundies

One of the early lessons so far in 2026 is to expect more disparity across the investing landscape.

On the ASX, materials and energy are already pumping, tech is still getting whacked. The S&P 500 is slowing, even as US mid caps accelerate. Gold is shooting for the stars and silver is hot on its tail. 

At the pointy end of what has been a years-long bull market for many asset classes, discernment could be the order of the day. The rising tide that has lifted all boats in recent years could give way to a rough swell that dashes some on the rocks.

As Chris Siniakov, Head of Fixed Income for Franklin Templeton Australia suggests, "with valuations relatively full across asset classes, the strong returns of recent years are unlikely to be repeated in 2026," he said. 

It's where less volatile asset classes, like fixed income, earn their stripes.  

"In markets where everything is rallying, discrimination matters less. At this stage of the cycle, however, it becomes much more important. When capital is being allocated across asset classes where opportunities are highly compressed, fixed income can offer a more balanced and attractive risk-adjusted return," Siniakov says.

Schroders Australia's Head of Fixed Income, Kellie Wood, says bonds once again represent a compelling opportunity.

"Fixed income is returning to its strategic core role for diversified Australian investors in 2026," says Wood. "As equity market valuations look stretched and economic growth moderates, bonds offer four distinct benefits:"

1. Diversification: With weak correlation to equities, fixed income stabilises portfolios - especially amid volatility, as recently demonstrated by US Treasuries’ defensive strength.
   
   
2. Income return: Elevated yields mean bonds are again a real source of dependable, attractive income, especially for those underweight the asset class.
   
   
3. Risk mitigation: As macroeconomic and geopolitical risks linger, bonds act as a proven buffer, mitigating drawdowns during stress events.
   
   
4. Valuation reset: After a multi-year reset, fixed income stands out versus equities and alternative assets on a risk-adjusted basis. Solid income can now be captured without compromising quality or taking excessive duration risk.

Adam Grotzinger, Senior Fixed Income Portfolio Manager at Neuberger Berman, says opportunities abound in fixed income right now. 

"Simply put, investors, including those who have been previously underweight, should care about fixed income in 2026 because yields offer attractive income and total‑return potential, including some interesting high quality carry opportunities," he says.

(Source: Neuberger Berman, as of 31 December 2025)

Not only are yields attractive, the asset class is also offering opportunities for investors and active managers looking for outsized performance.

"Beyond the sheer appeal of all-in yields," says Grotzinger, "there continue to be pockets of opportunity for clients engaging active managers to generate alpha – by widening the scope of investments across duration bands and geographic exposures, as well as by focusing on selectivity in credit to navigate tight spreads and a potential increase in idiosyncratic credit events." 

"The variety of opportunities to add value will be particularly relevant this year given high equity valuations and concerns about a lack of transparency and potential over-leveraging in private credit."

It's a theme that Franklin Templeton's Siniakov is also keen to stress. A level of discernment - and the expertise of active managers - could hold investors in good stead in the fixed income space in 2026.

"Fixed income offers investors the potential for an attractive return relative to cash, but you need to choose wisely," Siniakov says.. "Traditional benchmark-driven index characteristics have not worked particularly well over the last decade."

For Franklin Templeton, it's about targeting quality as well as remaining nimble. 

"Our Absolute Return approach is centred on careful sector and security selection; maintaining a high-quality bias; and retaining the flexibility to add risk when we see compelling valuations."

Ultimately, the argument for fixed income this year speaks for itself, says Schroders' Kellie Wood:

"Fixed income is entering 2026 with its most compelling risk-reward profile in years, especially for those seeking greater diversification and income." 

As ever, discernment is the name of the game for those wanting to make the most of the opportunity.

"Investors should monitor inflation dynamics, central bank policy trajectories, and market liquidity conditions carefully as they position portfolios for the next phase of the cycle."