Principal Asset Management has flagged resilient fixed income markets as selective opportunities emerge amid easing policy and persistent inflation.
The firm entered 2026 cautiously optimistic on fixed income, arguing resilient markets and selective opportunities are likely to define returns as policy easing unfolds against persistent inflation pressures.
In its First Quarter 2026 Fixed Income Perspectives, the firm says sustained economic growth and an anticipated “slow drip” of US Federal Reserve rate cuts are reshaping the opportunity set, with returns expected to align more closely with long-term averages, particularly in higher-quality sectors such as investment-grade and securitised debt.
Chief investment officer for fixed income Michael Goosay said the trajectory of interest rates would be pivotal in shaping outcomes in the year ahead.
The Federal Reserve is expected to gradually lower policy rates towards a neutral level of around 3 per cent, as it balances inflation that remains above its 2 per cent target against a cooling, but resilient, labour market.
Goosay said the environment remained constructive for fixed income investors seeking income and total returns, though agility would be required as spreads remain tight and issuance increases.
Strong technical conditions and robust fundamentals continue to underpin markets, but new supply may exceed demand as issuers take advantage of the easing cycle.
Across sectors, the firm remains constructive on investment-grade credit, supported by strong carry, stable fundamentals and manageable supply.
All-in yields are described as historically attractive, with relative value seen in the five- to 10-year part of the curve and among large US banks and select BBB-rated technology issuers linked to artificial intelligence investment.
High yield credit is also viewed as a viable source of income, though upside is expected to be constrained by tight valuations and rising supply, while defaults are forecast to decline to around 2.75 per cent in 2026 from more than 4 per cent in 2025, with modest spread widening likely as issuance accelerates.
In securitised debt, strong demand continues to support the sector, but rising dispersion is reinforcing the need for issuer-level selectivity.
The firm favours agency mortgage-backed securities with call protection, selective exposure to commercial mortgage-backed securities, and disciplined positioning to manage convexity risk as rates fall.
Municipal bonds are described as entering 2026 on a firmer footing following the resolution of federal tax-exemption uncertainty.
Elevated yields and a steep curve are expected to reward duration extension, particularly in revenue-backed bonds tied to infrastructure, housing and energy projects.
Emerging market debt is positioned as a source of attractive carry and diversification, supported by improving fundamentals, credible monetary policy and the prospect of a weaker US dollar as the Fed eases.
Meanwhile, private credit is expected to benefit from renewed deal flow, easing rates and resilient fundamentals, with middle-market direct lending highlighted as offering compelling risk-adjusted return potential.
