Key Convictions: Second quarter 2026

Market insights at a glance

In 2Q26, global fixed-income markets face a more complex backdrop as geopolitics, rapid AI adoption and private credit scrutiny intersect. Energy price shocks have lifted near-term inflation and reset central bank expectations, with markets now leaning toward hikes rather than the cuts priced earlier this year. Longer-term inflation expectations remain anchored, and the rates repricing may be overdone. Despite tight valuations, fundamentals are supportive; we favor short-end duration and selective high-quality spread opportunities (corporate new issuance, AI financing and CMBS).

This quarterly update is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard covering the following:

• Growth: Global growth faces near-term headwinds, particularly outside the US, where higher energy costs are weighing on activity. The US remains more insulated due to energy independence, fiscal support and resilient consumer balance sheets, while Europe and parts of Asia are more exposed. China and Japan continue to rely on policy support.
• Inflation: Recent increases in energy prices have lifted headline inflation, particularly in energy-importing regions. However, easing goods inflation, fading tariff impacts and well-anchored longer-term expectations suggest inflation targets remain achievable over time.
• Rates: Market-implied policy paths have shifted materially, with short-term rates moving higher while long-term yields have risen more modestly, resulting in curve flattening. The speed and magnitude of the repricing suggest rate expectations may be ahead of underlying growth and inflation fundamentals.
• Geopolitics: Heightened tensions in the Middle East have increased volatility, primarily through energy markets and related supply chains. While risks of escalation remain, economic and political incentives point to some potential for de-escalation, though outcomes remain  highly uncertain.
• Credit Markets: Public credit markets continue to be supported by strong corporate balance sheets and healthy household fundamentals. In private credit, rapid growth has increased scrutiny, with shorter maturities, rising pay-in-kind interest and elevated redemption requests highlighting potential liquidity and refinancing risks, even as the broader banking system remains well capitalized.
• Labor Markets: Labor markets continue to be characterized by low hire and low fire dynamics, limiting near-term unemployment risks. Income growth supports consumption, while structural forces, including technology adoption, are creating uneven impacts across sectors.
   

Fixed-Income Overview and Outlook: Rates reset, risks rise—opportunities emerge

In the second quarter of 2026, global fixed-income markets are navigating heightened uncertainty driven by geopolitical tensions in the Middle East, rapid technological change and increased scrutiny of private credit markets. Energy-related supply disruptions have lifted near-term inflation and triggered a sharp reset in market expectations for central bank policy, with investors now pricing rate hikes rather than the cuts anticipated earlier in the year.

While near-term inflation pressures are evident, longer-term inflation expectations remain well anchored, and we believe the magnitude of the recent rate repricing may be somewhat overdone. Global growth is expected to moderate, with the US remaining relatively more resilient than other regions due to energy independence, fiscal support and strong underlying fundamentals.

Despite tight valuations across spread sectors, credit fundamentals remain supportive. We favor selectively adding short-end duration and taking advantage of high-quality opportunities in corporate new issuance, AI-related financing activity and select areas of securitized credit, including commercial mortgage backed securities (CMBS) and collateralized loan obligations (CLOs).