Hello, and good afternoon, it's Mark Dowding here, CIO at BlueBay Fixed Income, and back for this sort of webinar series that we did last year. This is the first one, of course, of 2026 and welcome back those who dialled in last year, and hello to everyone who perhaps may be joining for the first time.

In terms of the format, I've, tended to have something of a run around the globe, trying to cover some of the important themes as we see them, each month that we do this. And then, leaving about 5 minutes or so for Q&A at the end of the call.

Anyway, with that as an introduction, it's been quite a wild start to the year, hasn't it? Thanks to our friend in the White House, it feels like it's been all systems go, in terms of foreign policy and a series of different initiatives that have been sort of handed down. And particularly in terms of the geopolitical arena, it's been, a very significant, sort of, past few weeks.

But for all of the volatility that we're seeing out in the White House, I'd actually contrast the fact that financial market volatility has actually remained pretty subdued.

We did see, sort of, yields under pressure a bit last week on some of the noise around Greenland, but largely speaking, if I look at where yields are in terms of US Treasuries today, you're back with 10-year yields sitting in the range that they've sat in pretty much from the start of September. US tens in a range of between 4 and 4.25.

It feels like you're kind of sitting there in a situation where no one is now expecting any further Fed rate cuts in the near term. That's an expectation that's for further out this year. But you've got a US economy that's doing pretty well. Growth is seen running north of 3%, albeit in a bifurcated economy where business investment spending is running very strong, thanks to the investment in AI.

At the same time, the picture on employment is much weaker, but because of the clampdown on immigration, we are seeing sort of lower, sort of, underlying population growth.

And consequently, the low payroll prints that we're witnessing aren't something that's really giving any real concern to a move up in unemployment. And you can kind of see this as well if you track the weekly jobless claims numbers, which have continued to be very stable.

So, the economy's doing just fine against that backdrop, you've also got sort of an inflation picture, where inflation remains somewhat above the Fed target, but not in a way which is particularly troubling at the moment. But you are, therefore, in a sort of a situation where the economy is, enjoying pretty much Goldilock conditions. It's not too hot, it's not too cold, everything's kind of just right.

And there is this hope that actually an incoming Fed chair who adheres to the sort of Trump narrative that actually AI investment is going to be something that drives productivity growth going forwards and therefore mitigates any inflation pressure. That incoming Fed chair will be one who's inclined to want to deliver a rate cut or two once he has announced and in position after May 2026.

But in the interim, you've got everything kind of going sideways, and you've kind of got the Fed on hold. And that's really sort of causing bond yields to be relatively trapped in something of a range. Now, with that being the case, investors are looking for where they can earn carry in a low volatility environment. This has continued to compress corporate spreads, and we now see the index of US IG corporates at the tightest it's been since the last five years.

So, we're looking at sort of tight levels of spreads. I think I even saw a Bloomberg header yesterday, or last week, I was actually traveling in Asia. But I think there was a Bloomberg story that actually said that IG spreads are at the tightest that they've been pretty much for the last 20 years, or even longer than that. So, it gives you a sense for how IG spreads are compressed.

Against that, credit always does kind of fine when recession risk is low, and we do see recession risk remaining low. But the one thing which we would cite as an obstacle to further spread tightening at this moment in time is, if you look at where spreads are in terms of valuations, and then you look at what is happening in terms of supply. US IG credit supply used to run around $400 billion a year, going back, sort of, 2 or 3 years.

Last year was a really big year of supply. We saw just over $600 billion of gross issuance in US IG corporate credit. But this year, in 2026, a further jump is expected on the back of the hyperscalers issuing a lot of debt. We could get to a trillion dollars of issuance in terms of US IG corporate credit this year, which is a very big number, and we do think that that is a supply headwind.

So, again we see this as a reason to think that the train towards ongoing, tighter, ever-tighter spreads, we think is starting to run out of track at this particular point in time. So, we're in a moment where we're, if anything, sort of reducing beta exposure in terms of the IG exposure that we're running, just because we think we're in a world where you are just investing for carry at this particular juncture.

Otherwise, high-yielding securities have been doing better. You've seen ongoing compression, and high yield is still space that we continue to see doing fine against this particular backdrop.

But some of the concerns, we think, are continuing to build in areas like private credit. We think there are many assets in a lot of private debt funds which are really underwater, that haven't been marked down as they're marked down. Reflecting some of the credit impairment that we are seeing come through in that space, with default rights at 5.5% on the underlying obligors in a lot of U.S. direct lending funds now.

With that being the case, we think there could be some more pain ahead in that part of the market. I'd also cite as well in private credit. It's kind of interesting, on a sectoral exposure, one of the things we've looked at in terms of US high-yield corporate bonds, a lot of the issuance there is old economy.

It's boring stuff, but boring stuff without too much leverage, that largely is making, sort of reliable money. Whereas if you look at the investment universe in a lot of private debt funds, we see as much as 30% exposure in areas like software.

And I highlight that in particular because software is a space that we think is potentially one of those areas that could be disrupted by some of the AI changes that we see coming through the economy in the quarters to come. So, it's a part of the market where I wouldn't be surprised to see a higher incidence of corporate defaults going forwards.

And so from that point of view, I was speaking at a conference last week, and it was quite notable to see how

investors who were participating were voicing much more interest in investing in hedge funds, very little interest in investing in private debt at the moment.

And indeed, one of the big wealth platforms I met in Asia said that they're coming into 2025, 2026, actually reducing their allocation in private markets and private debt more specifically, which I think was interesting. It caught my attention, because for a long time, it feels like we've been hearing about increased client interest in that part of the market.

Anyway, so moving on, I think a couple of other things to say in the US is, obviously we're waiting for the identity of the Fed Chair to be announced any time. Who knows when that's going to happen? I think that when we do get the announcement of a Fed Chair, it's likely to be someone who's well-respected by markets, and someone who is a serious individual, not someone who's just going to be seen as Trump's stooge or puppet.

From that point of view, I think some of the concerns around the Fed credibility may be a bit overstated. I know earlier in the year, this idea that there is a court case against the Fed by the DOJ was something that grabbed a lot of attention. But speaking to Fed insiders, I don't think you're likely to see the Fed holistically undermined. And if anything, it's interesting that with Stephen Miran, who's someone who we met in the White House a couple of times last year, with him now at the Fed and taking a very extreme position, wanting to cut rates very aggressively, it's been interesting to see how his voice has really been marginalized within the Fed.

And I think that if a new chair wants to take the committee with him in order to deliver rate cuts, then it'll be need for, necessary for him to position close to the consensus. He won't be able to adopt a very extreme view. And more to the point, I think that a really extreme view won't really be, sort of, merited because ultimately that individual is going to care about how they're viewed by markets, they're going to be caring about their legacy. No one coming into that Fed chair position wants to end up becoming known as the next modern-day Arthur Burns.

And from that point of view, I think some of the concerns around U.S. policy credibility on the Fed may be a bit overdone. That said, some of the maverick approach around the way in which Donald Trump is behaving on foreign policy, I think, is truly concerning, and it is undermining trust in the United States.

We see this being reflected somewhat in terms of FX markets at the moment with the dollar on the back foot. In many respects, when we think about ongoing US growth exceptionalism, I'd actually contend that it should be an environment where the dollar is going a bit stronger at the moment, particularly when you reflect on the fact that the European economy is really pretty weak, and you've got sort of more of a carry advantage in the dollar's favor.

But the thing that continues to handicap the dollar is just this factor of concern around Trump and that sort of diversification of investment away from the United States by global investors. And so, those two forces are obviously in interplay at the moment, but we wouldn't, sort of want to get carried away with the idea that the dollar is going to be too weak this year, we'd be, if anything, more inclined to look for the dollar maybe doing a little bit better in some of the months to come.

We also have shortly some incoming ruling due on the IEEPA tariffs. We wouldn't be surprised if they're not voted down, but if they are, look for those to be replaced. So, if there's volatility around the IEEPA vote, I think it's likely to be short-lived.

So that's really the backdrop for Treasuries, not really the most exciting market for US rates, or for that matter, US credit either. And if I turn across the Atlantic, I think that we're also expecting to see something of a range-bound environment in terms of European fixed income.

Here, in terms of looking at, sort of, German bunds, they underperformed Treasuries last year on fears of, German, sort of, fiscal expansion. And the fact that Germany is continuing to push in that direction is something that has been a factor that's been weighing somewhat on bunds. As has some of the changes within Dutch pensions, which has reduced some of the intrinsic demand for owning Euro duration.

However, I would note that, looking at the eurozone economy, the economy looks to be remaining relatively weak. We do see inflation risks more skew to the downside in Europe, particularly on the back of some of the competition in terms of prices coming from Chinese imports. And I think that this is a factor that, could see, sort of, inflation drifting down to 1.5% or lower as we move through the course of the year.

And from that point of view, the ECB is going to be more likely to cut rates this year than they're going to be to hike. It's just that for the time being, I think any adjustment on rates is unwarranted, and the ECB will be wary of delivering any monetary easing at a time when they know that monetary policy is also moving in an easier trajectory.

The other thing to say about Europe at the moment is some of this sort of noise around Greenland. I think this has really been a factor that, if anything, has really shocked and concerned European policymakers. There's been a real state of grave concern, as expressed obviously by some of the leaders at Davos last week. I think this continues to drive this agenda towards bringing forward defense expenditure, and so we'll be interested to watch this particular space.

It's also been a catalyst which has actually been seen as actually somewhat beneficial in terms of European solidarity. Sort of Trump acting as he is, if anything, is driving Europe closer together at the margin, and this has been a factor that has been beneficial in terms of Euro sovereign spreads over the course of the past week.

Otherwise, again in euro credit, nothing too exciting to say. But if I move on to a market where I think there may be more of an opportunity, here I'll actually highlight the UK. Here, close to home, I think that we're likely to see weaker economic growth. And that weaker growth outlook is starting to weigh, we think now, on employment, and as it does so, that may mean lower wage growth. If we see wage growth coming down, expect to see ongoing normalization in inflation that could suggest that the Bank of England has got more room to cut rates than other countries do over the course of the year ahead.

We have a Bank of England meeting in a couple of weeks' time. We're not expecting a rate cut just yet, but we do see things evolving in a more dovish direction for the UK. And with the valuation on gilts being more attractive than it is in overseas markets, we think there is scope for gilt yields to move lower, particularly with a dramatic reduction in the weighted average maturity of the debt profile in terms of UK government debt.

More of a focus on shorter-dated issuance is taking away the pressure that we had last year on the long end of the bond market, with also the Bank of England now sort of desisting from selling longer-dated bonds. And so the technical picture for longer-dated gilts we'd also suggest is looking a bit better.

So, we like the outlook for the UK, but we continue to be quite bearish on the pound. Here, we would cite the fact that any path towards softer data and rate cuts is likely to weigh on sterling, as may, political risk.

We don't think that we're going to see a challenge to the leadership of Keir Starmer ahead of the May local elections, but later in the year, it certainly looks like it's coming, and any move that Labour makes is probably taking it in more of a leftward direction, and we think that that may, sort of, lead to more of a negative view in terms of market risk sentiment.

Otherwise, turning to Japan possibly the most interesting market over the course of the last couple of weeks. In Japan, we've seen the new Prime Minister Takaichi call a snap election, which will take place on the 5th of February, a very short timeline here, seeking to consolidate her position.

Her stance as wanting to drive growth, run easier fiscal policy, also easier monetary policy has been something which has been a factor that has really weighed on Japanese government bonds. It's also been weighing on the Japanese yen as well. And we've seen a big dislocation of the long end of the Japanese bond market, to the point where if you looked at very long-dated Japanese bonds at one point they were getting yield levels close to 4%, are obviously higher than long-dated European yields. And in forward space, long-dated forwards were actually above, levels which were being recorded in the US dollar market, which I think was really quite striking.

Here we would suggest that some of the fears around fiscal debt sustainability in Japan are being overplayed. Yes, it's a country with a lot of debt to GDP, but actually it's a country with relatively low net debt. It's a country with a lot of domestic savings.

Furthermore, you tend to see debt sustainability crises where you're running big fiscal deficits and also current account deficits. Japan is running more of a current account surplus position.

And also, when I talk about the Japanese fiscal deficit, last year you may be surprised to learn it was only 2.5% of GDP. Even with any fiscal easing that Takaichi may do, that may only end up adding 1% in terms of the deficit, which is a lower deficit number than many other countries in 2026. I'd also highlight, with the economy growing in Japan and inflation positive, we're still going to continue to see the debt-to-GDP ratio on a downward trajectory this year.

So, some of the paranoia, some of the concerns, I think may be overplayed. I think part of what we're seeing in Japan has been more of a buyer's strike. Domestic investors tend to move as a herd, they tend to move en masse. They haven't wanted to buy long-dated duration, and at that time, in that context, the Minister of Finance in Japan has done a bad job of issuing too many long-dated bonds. And so that supply-demand imbalance is what has led to an overshoot in markets.

Then, of course, last week we saw how that move up in long-dated Japanese yields was starting to also be reflected in longer-dated yield moves in other markets, and including in the US. And so, from that perspective, interesting that Scott Bessent and others in Treasury in the US, were actually contacting Japanese counterparts, saying “You're becoming a problem, we need you to stabilize your bond market, we need you to get yields down”.

And also, at the end of the week, we also saw this move to really sort of look to cement the support by Japan in terms of raising the threat of joint intervention in FX, which has taken the yen stronger.

But these moves, which we think will stabilize the yen, are also likely to be stabilizing to Japanese government bonds, and from that perspective we've actually moved in the course of the past week to a long duration position in JGBs. Actually, it's probably the first time we've been long Japanese bonds in a duration context, I reckon since 1999, so it's quite a momentous moment to share from that point of view.

I'd also say that we do see the value at the long end of the curve there, something that we have expressed a view on in terms of the 10s/30s spread.

As for the yen, here I think things are still more choppy. We haven't actually seen any intervention just yet. I think we may end up seeing the yen stabilize. But in many respects, if we're looking at a cross that looks more exciting to us, it's probably euro/yen rather than dollar/yen. I'd suggest that if euro/yen is up at 185, again,

that would be a very interesting level to actually be long at the yen relative to the European currency.

We also like the idea of being long yen versus sterling, perhaps is another idea we're looking at. And alongside that, we also see scope for intervention in the Korean won, which is also a currency we like.

Elsewhere in EM, I'd also like to highlight that one of the things that we've really seen playing out as a theme goes back to what we were hearing in the White House last year. The idea that was being expressed to us 12 months ago, that the new administration wanted to focus on Monroe Doctrine, having the Western Hemisphere as a sphere of influence for the US as a nation, I think is something that we reflected on.

It was one of the reasons in EM funds, we were long of Argentina, which did very well last year on the back of the support for Milei ahead of the elections. It was also a reason, a factor behind being long of Venezuela, which again has really benefited our EM funds very strongly at the start of the year. And indeed, our EM hedge fund in fixed income that we're running is up pretty much 4% in January. It's had a tremendous month out of some of those calls.

But you can think through this sort of outworking of Monroe Doctrine as something that can continue to have an impact on the valuations of certain LATAM assets that we're investing in.

We also think it's something that is potentially a catalyst that may drive more US investor engagement in emerging markets, both in EM equities and in EM fixed income, in the course of the coming year and years to follow. At a time when EM participation has been relatively modest, and investors have tended to overlook that market, at a time when there's not a lot of cheapness in other markets. This is an area that looks cheap.

Mark Dowding: We'd also be highlighting attractive currency carry in local currencies, currencies like the Turkish lira, even the Egyptian pound and the Nigerian naira for some of the more adventurous EM funds in more frontier markets. Also in the Brazilian real as well.

Against the backdrop of low volatility for the time being, we want to own carry, but we think there's probably more carry opportunity in some EM FX than there is in IG corporate bonds, or corporate bonds in general at the moment, and so this is maybe where we've been looking for some of the opportunities.

But I think the other thing that we'd reflect on is the fact that although markets have been very calm at the start of the year, even though it feels like everything in politics and geopolitics has been going a bit crazy, we do think that this reshaping of the world order, this idea that political trends continue to point in a high volatility outcome, it's not going to mean that the low-volt environment that we're in is going to be an enduring one, lasting one, that takes us all through the course of the year ahead.

We have many concerns as we look further out in terms of AI valuations, or whether, for example, in AI, this big sort of ramp-up in investment spending, which is obviously helping support those valuations for the time being on the back of a big growth in AI investment. Can that be repeated again? Can you see further growth again into 27, and then again into 2028? Or at some point, would that sort of growth rate start to roll over, and is that going to be the point where some of these valuations are being questioned?

There are many factors that we're looking at, are many risks. I tend to think that the risks may come to the fore in a greater context, in the second half of the year rather than the first half of the year.

For the time being, we've been happy to own some carry, own some risk, generate some alpha in that context. But then again, it feels like at the moment, you wake up to yet a new policy initiative. We never know what's going to be around the corner. And of course, it's often the really unknown unknowns that none of us have planned and prepared for, the real things that can really have the habit of upending markets.

With that, I think I've probably been speaking for about, yeah, there you go, 24 minutes. I'm going to turn to the Q&A at this particular point in time, and see if we have something online.

So, so here we have a question. Jim Grant, known for making a following statement on gold. Gold, is the, reciprocal of faith in central banks. Do you think this is now the consensus view, of gold today?

So, yeah, obviously what's happening in commodities and in metals has been very interesting. The way that I look at the moving gold, firstly, I think there are a couple of things which are happening fundamentally. Firstly, I'd note that, ever since the weaponization of currency reserves on the onset of the Ukraine war, it does mean that if you are an entity in maybe a sketchy country, or you're a sketchy individual and you're at all concerned about any degree of possible future sanction risk, of course there's a legitimate asset allocation trade away from hard currency and hard currency assets in towards physicals such as gold, which has been driving demand. That's one factor.

The second factor has been obviously the reality that we're running a lot of government debt as leading to concerns around a debasement trade, which has also been driving demand for commodities such as gold.

Thirdly, I'd also note that in societies like Asia, there's always tended to be more of a desire to own gold, and this is where we're seeing the most rapid growth of global savings at the moment, so this is where we see this allocation being pushed towards things like gold at a time when supply is relatively fixed, and that pushes up prices.

But lastly, I'd also highlight that there'll always be a part of the market where people want to speculate and make short-term gains. There are always people jumping on a trend. We've seen that in crypto, we've seen that in AI. I think we're seeing a good deal of that now in what's happening in terms of some of the movements, in terms of some of the commodity prices.

So, some of this move is justified, some of it isn't. But I don't think it is all about a central bank debasement trade. If that was the case, bluntly, yield curves would be a lot steeper than they are, and from that point of view, I think that the comment about gold being the reciprocal of trust in central banks, I think that that is only part of the story. I think it's a bit of a naive assessment. I think there is more to it than that.

With that, I'm going to questions, and today, that is the only question. Oh, actually one more has come through, so I'll do one more question.

So, with credit spreads, very tight, and equity risk premium negative, is credit priced for a zero default cycle?

And so, I think the answer to that is, credit is pricing very low default risk, but if you look at realized defaults over the course of the last couple of years, you're still being more than compensated for

the past level of defaults if they were to occur. The losses therein within the current spread.

And look, the reality is that in an asset class like high yield, there's always going to be some restructuring, there's always going to be some default. And this year, we do expect somewhat higher defaults than last year. Asset classes like emerging market corporates, we are expecting a more material pickup in defaults to occur this year.

So, I don't think that, in a way, you're pricing zero default risk, but certainly there is a bit of a sense in which, you're pricing a lot of good news. Arguably, you're not pricing all of the risks that may be manifest during the course of the year. And at some point, that is, sort of highlighting the idea that there is a degree of complacency.

Next one up, do I see the flattening of the UK curve, and with higher, short-end rates and lower long-end rates?

Well, here, actually I think that the front end can rally as well, so we like both the front end and the long end of the curve in the UK, so we don't have a particularly strong curve view. As I said, we think that, actually, the UK economy is going to be quite weak, inflation's going to be quite benign, so we do think that the Bank of England will have room to cut.

“Do we see a risk of a sell-off in developed markets, sovereign assets, notably in treasuries, as Japanese investors move more towards owning domestic JGBs?”

Well, here, I do think that the reality is that Japanese investors, I don't think are going to turn sellers of treasuries. But incontrovertibly, what we're seeing is the BOJ used to be the big buyer of JGBs. As they step back, domestics will actually have to pick up the stack there in Japan. So, what this means is there's going to be less new money going into overseas assets forward than there has been in the past.

And so, I think markets like the US, other markets are going to be more reliant on more domestic savings. And so, when we talk about the growth of issuance in terms of US fixed income securities, again is it going to come from money market funds? Where's that money going to be coming from? Because it's not going to be coming from Japanese investors, and I'd say not from other overseas investors. And it is a factor; it is an argument why you might expect to see more of a term premium in markets going forward.

And then, very lastly, is the US exorbitant privilege coming to an end? Are we watching the Thucydides trap play out?

What here, look, honest answer is U.S. growth is still outperforming. You're still dealing with US growth exceptionalism. So, I think it would be a little bit short-sighted to think that this is the end of things for the United States. I know that in Europe sometimes there's this desire to think that this is the moment where it's all gone horribly wrong in the United States, but actually, the US economy is still doing pretty well.

So there are fears that I may have longer term, but just in the here and now, don't get too bearish on the US economy, or perhaps on US assets, or the dollar for that matter, because it's still a place that's performing pretty well, and it may pain you to hear it, but actually, in the course of the past week, Donald Trump's approval rating went up, didn't go down.

So, that is the, the world in which we live in, and one that we continue to, sort of work hard to do our best to make sense of.

With that, I'm going to leave my comments, I'm going to close the call. Thank you for joining, I hope you found that useful and interesting. Do give your feedback to your BlueBay representatives. Otherwise, I hope you're able to join when we do this call again this time next month.

All the best in navigating these markets, and for the months ahead. Thanks for now. Bye.