Why quality is becoming the defining theme in fixed income

As things grow increasingly volatile both inside and outside markets, it's likely investors will be placing even more emphasis on the risk side of the risk-adjusted returns equation in 2026. 

Kellie Wood, Head of Fixed Income at Schroders Australia, believes fixed income could tick that box.

"In a world where the search for yield once forced uncomfortable risk-taking, 2026 marks the return of high-quality, defensible income, allowing investors to combine robust returns with prudent risk management in the core of portfolios."

As investors consider their options this year through a risk-calibrated lens, we ask leading fund managers for their thoughts on the biggest risks and opportunities for fixed income in 2026, and where it can deliver for investors trying to strike the right risk/return balance. 

The key opportunities

According to Wood, "2026 represents the most attractive fixed income environment in years," and the biggest opportunity is the return of quality credit offering attractive returns.

"Despite tight credit spreads, all-in yields across global credit remain robust, driven by the sustained elevation of risk-free rates rather than mere spread compression," says Wood. "This backdrop creates a compelling carry environment, especially for higher-quality credit, enabling investors to secure premium yields without sacrificing credit standards."

"Today’s fixed income opportunity is anchored by high risk-free rates; investors no longer need to chase yield in riskier parts of the market. Instead, resilient issuers with strong fundamentals (especially those in investment-grade and select sectors, such as Australian BBB corporates) offer both immediate carry and valuable upside potential as market conditions evolve."

Global opportunities are also likely to re-emerge on local investor radars, says Wood. "Critically, hedging costs for AUD investors are now manageable, restoring global diversification as a paid-for feature rather than a drag."

Adam Grotzinger, Senior Fixed Income Portfolio Manager at Neuberger Berman, agrees. "In our view, the ‘best’ opportunity in fixed income for 2026 is to focus on global diversification across high-quality income opportunities."

He argues that "likely less volatility for longer-dated maturities (especially in the US) should allow modest duration extension due to curve steepening, disinflation, and the ability of the US treasury to control supply."

Grotzinger also suggests investors "broaden exposure to global markets where central bank paths are mispriced." He points to the Eurozone as an example, "where potential further rate cuts, tepid growth and moderate inflation should favour European duration exposure."

Elsewhere, he sees opportunities in other foreign bonds and emerging markets.

"Japanese Government Bond yields (USD/EUR hedged) stand out among high-quality sovereigns," says Grotzinger. "This market’s attractiveness is supported by reduced long-end supply, and likely continued disinflation, which should support yields."

"Emerging Market Debt should see strong results given favourable growth trends and moderate inflation. EMD typically outperforms in periods of U.S. monetary easing and dollar weakness, and is supported by near decade-high real yields."

Chris Siniakov, Head of Fixed Income for Franklin Templeton Australia, is looking at shorter-dated bonds, but with the same focus on quality. 

"The sweet spot for fixed income in 2026 appears to be in shorter-dated Investment Grade credit," he says. "This year is shaping up to be mostly about earning carry/yield, and patience with a high-quality portfolio may be well rewarded."

"Credit has been the star segment within fixed income over recent years, and while credit spreads are now close to all-time lows, total yields remain attractive given the base risk-free government bond yields are still elevated."

In Australia, the rates landscape means quality shorter-dated bonds could be the play. 

"We are now entering the third year since official cash rates peaked in 2023 and despite RBA policy easing, government bond yields remain close to their highs," says Siniakov.

"At this juncture, we can still construct a diversified high-quality (average single- A) portfolio of shorter-dated bonds offering yields around the 5.0% level. That’s attractive relative to the current cash rate of 3.6% and may provide a more appealing risk-adjusted profile than traditional composite bond portfolios."

The potential risks 

According to Schroders' Kellie Wood, the spectre of inflation still looms large in the equation.

"The primary risk facing fixed income investors is stubborn inflation," she says. "Should price pressures prove more durable than anticipated, central banks may delay or even reverse their pivot towards lower rates - placing duration-sensitive assets at increased risk. Price declines could quickly offset income, particularly for longer maturities, as both Australian and global rates remain volatile in response to policy shifts."

Fixed income is also not immune to the geopolitical risks that are complicating the picture across markets and asset classes. 

"A less discussed but significant tail risk is the prospect of rising geopolitical fragmentation, which could disrupt funding markets and liquidity in sovereign and credit sectors," says Wood. "Policy shifts, sanctions, and regulatory changes threaten to make cross-border investing more complex, heightening the chance of pricing dislocations."

Building on that, Neuberger Berman's Grotzinger believes certain macro risks could spook bond markets. 

"There is definitely an element of macroeconomic tail risk in markets that investors should keep in mind," he says. "Potential risk events could include if US labour markets underperform and unemployment rises higher than current expectations, if there is a surprise stall or re-acceleration in inflation, or if there is a repricing of fiscal concerns in sovereign bond markets that drives a rate sell-off."

But this would simply reinforce the argument for diversified fixed income, says Grotzinger. 

"Rather than scare investors away from fixed income, in our view these macro risks are further incentive to diversify exposure globally."

Franklin Templeton's Siniakov is also wary of macro risks, specifically the question of liquidity. 

"One area I am monitoring closely is global liquidity conditions," he says. "At present, the globe is awash with liquidity and valuations are strong across most major asset classes—equities, credit markets, property, commodities, and even digital assets."

"The party feels like it could go on forever. But for those of us who have been around for a while, we know that the music eventually stops."

He points to the European sovereign debt crisis in the 2010s as an example of what can happen if liquidity dries up. "That event was heavily driven by a withdrawal of liquidity. A sudden stop in market funding exacerbated underlying solvency and structural issues."

"With that in mind, we remain attuned to key policy-maker risk—particularly from central banks and governments—given the influence their decisions have on how monetary policy needs to be conducted and how fiscal budgets are spent. We monitor global capital flows and liquidity trends, as any meaningful withdrawal could have implications across markets."