2025 was quite a good year for US fixed income markets. Treasuries had their best year since 2020 on the back of interest rates moving lower through the course of the year. At the same time, we saw relatively robust economic growth, and this was a factor that helped corporate credit to deliver outperformance with spreads moving tighter, both for IG corporate bonds as well as bonds in high yield.

Moving to European fixed income markets, it wasn't such a strong year. Here, on the back of fiscal expansion plans announced by Germany back in the first quarter, we saw German Bund yields move higher, and index returns didn't really cover from this particular shift. Indeed, over the course of the year, we've seen yield curves moving steeper, again, partly driven by changes around demand in fixed income, which seemed to be seeking more credit exposure, less durations exposure.

This was something characterized in the recent shift around Dutch pension fund legislation. Elsewhere in Europe, we have seen French spreads deteriorate over the course of the year. France continues to be a country that lives beyond its means. Political volatility is never too far from the surface. Though at the same time, I would note that the volatility in spreads remains relatively contained this side of an election in 2027.

Otherwise, politics was also a factor weighing on gilt yields. Here we've seen longer-dated gilts struggle for much of the year against a backdrop of uncertainty in terms of policy credibility, in terms of the Starmer government with Rachel Reeves as Chancellor. That said, we have seen interest rates coming down on the part of the Bank of England.

Again, this has been a narrative that has ended up driving a steeper yield curve through the course of the year.

Otherwise, in Japan, a rather different narrative, a stronger one, economically speaking, an economic narrative that has seen the Bank of Japan raise interest rates. Again, politics has been incredibly important. We've just seen the installation of the first female Prime Minister in Japan. Sanae Takaichi has come into office really looking to press the accelerator further in terms of policies with respect to reflation in the economy. This is continuing to push yields up. It's also driving the yield curve steeper, maybe on the back of some inflationary concerns. Again, another reminder this year, if we need it one, that policy and politics can be a big force driving fixed income markets.

Against that, you might say it's actually surprising that the US has been as well-behaved as it is given the expected angst, and concern with respect to the Trump policy agenda. That said, when it comes to things like tariffs, whilst there's a scope for that to have been very disruptive, if we saw a full-blown trade war, you would say that, relatively speaking, the introduction of those tariffs has been relatively uncontentious, or certainly not contested over the course of past months. On the back of that, that's another narrative that actually has, again, created a relatively benign backdrop in global financial markets.

There was a moment earlier in the year where we were asking questions around the death of the dollar, where we're seeing a major turn weaker in the US dollar on the back of some of the policies of the US administration. That would reflect that notwithstanding a weakening move that occurred in March and April, in the last six months, the dollar has been more or less tracking sideways. It hasn't really been a year where currencies per se have been the front, and center of attention in markets. Maybe there's much more focus, much more interest and excitement when it came to the topic of equities, AI, and bubbles. Otherwise, in fixed income, a solid market year all round, you would suggest.

Now looking into 2026, we will continue to contend that the US economy continues to maintain good momentum. We've seen growth on a strong footing towards the end of 2025. As we look into next year, we see the benefits coming from rates, cuts, tax cuts, and deregulation, also providing an economic tailwind. Furthermore, AI spend, which was anticipated to total 75 billion in the course of 2025, is expected to accelerate as much as 300 billion in the course of the year ahead.

With that much money being thrown at the economy, with those sorts of tailwinds, we are looking for another relatively strong year of US economic growth. At the same time, we're looking for somewhat higher inflation. This means that the backdrop is for really pretty strong nominal GDP growth. Against that backdrop, we would contend that, having seen interest rates come down in the last several months, the Fed doesn't need to be in the business of cutting rates further. Of course, it's possible that there will be further reductions, particularly if the labor market is weak, and also if Donald Trump wants to press his agenda on a new Fed Chair, trying to influence the need for lower interest rates.

Though at that particular point, you would note that actually, for the Republican Party, containing inflation is going to be very important if affordability is not going to come back once again when it comes to the midterm elections. From that perspective, my own take looking into 2026 is maybe that you will see fewer rate cuts delivered by the Federal Reserve than are currently discounted. That's largely on the basis of a more upbeat economic view that I think many in the market have.

Elsewhere, if I move to the European region, here we think that things are also going to be relatively dull. Although the European economy looks to be relatively weak, we don't see rate cuts being delivered at a time when fiscal policy is also moving easier. From that perspective, with fewer rate cuts on the table, we're largely looking at longer-dated bond yields more or less going sideways in the US, and in the Eurozone in terms of the year ahead, and so maybe government bonds delivering returns, not too dissimilar to cash.

All of that said, when it comes to credit, we would highlight that this backdrop for relatively robust economic growth is an environment where credit can continue to perform. Credit does well when recession risk is low, as it currently is. It struggles, of course, when recession risk is more prevalent. We push back against some of these assertions that we're looking at cockroaches in the credit market, with individual credit stories going bad. Yes, we've seen a couple of examples of corporate default, but these are more isolated. The sort of things we saw with Enron and WorldCom back in 2003. Generally speaking, we think that credit markets look, relatively speaking, okay to us. From that point of view, we think that we're going to see excess returns through carry, because, yes, spreads are already very tight. It's going to be difficult for them to go tighter still. Carry is, I think, where we see returns being driven. Otherwise, we like subordinated financials. We like safe carry in high-quality CLO tranches.

Looking at other fixed income markets, I would say that if we have an outcome which looks a little bit more sideways, a little bit more uninteresting when it comes to the dollar market, or in the Eurozone region, I would say that in both Japan, and in the UK, these are markets that look like there could be a lot more macro volatility, a lot more political volatility ahead. We think that, again, as we've seen over the course of the past year, changes developments in policy and politics will provide ample opportunity for investors to deliver returns through active management. These were some of the things that I'm excited about as I look into the year ahead.