Active Fixed Income Perspectives Q2 2026: Dispersion drives opportunity

Key takeaways

Big picture

Markets remain resilient: Higher energy prices pose an increasing risk to both the growth and inflation outlook. Front-end government bond yields have moved higher, but markets have overall remained tame. We have not materially altered our base case outlook, but outside the U.S., we expect a larger impact.

Higher yields are doing their job: Geopolitical shocks and rising energy prices pushed yields higher, but starting yields near or above 4% helped cushion total returns.

Macro

We see three scenarios from the impact of the conflict with Iran:

Base case: Progress that leads to timely resumption of shipping through the Strait of Hormuz would mean lesser impact to economic growth or medium-term inflation.

A protracted standoff: If oil prices remain above $100 per barrel for several quarters, we see a modest decline in U.S. growth and rise in core inflation. Europe would experience much greater impact.

Recession outcome: It could take oil prices of $200 per barrel for a year to trigger a recession in the U.S.

Central banks

Globally: Expectations shifted from near-term rate cuts toward the possibility of rate hikes this year in economies more exposed to energy shocks.

U.S.: We expect the Fed to remain on hold with the potential for a policy rate cut later in the year, dependent on clearer progress in inflation.

Credit

Dispersion: Performance is becoming more differentiated across subsectors and issuers, creating a bond picker’s market. We have added issuers with resilient business models now trading at more attractive levels.

Rising uncertainty is increasing dispersion and opportunity

 Municipal

Steep and cheap: With a historically steep curve, valuations look especially cheap for bonds maturing in 20 years and beyond. Tax-equivalent yields for bonds rated single-A and below also look attractive with supportive demand.

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