Andrzej Skiba, Head of BlueBay U.S. Fixed Income, discusses the investment outlook for 2026 and three key questions: monetary policy, AI bubble risk and the potential heavy credit issuance ahead.
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Welcome to the latest edition of The Weekly Fix. My name is Andrzej Skiba.
We’d like to wish all of our listeners a Happy New Year. Last one turned out to be a strong one from a total return perspective, despite all the volatility in the spring. We strongly believe that 2026 will be another bumper year for fixed income with high single digit returns a distinct possibility across various manifestations of our asset class.
As we start the year, we felt it could be an opportunity to highlight some of the key questions discussed by our teams right now.
Firstly, there is a broad debate about monetary policy in the US. As we mentioned a few times before, we expect US growth to accelerate beyond 3% in 2026, helped by the rate cuts we’ve seen so far, by aggressive deregulation drive from the Trump administration and by gargantuan AI capex spend. At the same time, we expect inflation to remain pretty sticky, unable to hit the Fed’s objective of 2% anytime soon. This would normally call for no cuts ahead and we do believe the US economy does not need any. Having said that we do see a good chance of some rate cuts this year, driven by the change in Fed leadership rather than the economic necessity. Still, the market is pricing in 2-3 cuts this year. We believe that’s too optimistic.
Secondly, we see a lot of incoming questions about AI and fears of a potential bubble bursting at some point in 2026. While this would likely impact equity markets much more than fixed income, we do see some spillover risk, were this to happen. We need to see continued evidence of a major increase in adoption of AI services to believe that the story is on track. We also monitor closely for developments regarding potential bottlenecks that can damage the sentiment. Two that come to mind are to do with the availability of power and, closer to home, of capital to fund the data center development. We expect waves of debt issuance across investment grade and high yield markets to fund AI capex and it remains to be seen how much capital is available for relatively unproven business models. We plan to be tactical, treading carefully across the heavy supply windows ahead.
Finally, we ponder the wave of supply in credit markets we need to absorb over the months to come. Buoyed by AI and M&A funding, investment grade credit could see $2 trillion issued this year. High yield issuance is also picking up, though in a less dramatic fashion. In recent years credit markets absorbed a lot of supply with strong demand from both domestic and international buyers. A good portion of that was driven by yield-sensitive investors, positioning for total return upside from rate cuts ahead. While yields remain pretty elevated by historical standards, we note that the sheer increase in the size of supply means that new pockets of demand might need to emerge. With spreads close to multi-year tights, this could prove challenging, but not impossible. What is needed is a move of some assets from money markets further out the curve, taking advantage of steep treasury yield curves, something that wasn’t the case even a year or so ago. Just a small portion of the $7 trillion invested would be enough to help balance the books. It’s therefore worth watching closely for how money market assets evolve as we progress through the year. In absence of this shift, we expect to see wider spreads as investors would have to find a new clearing level to absorb all the extra issuance.
In summary, we see a positive outlook ahead for our asset class. Helped by high carry income and a better economic outlook, there is a good chance of high single digit returns ahead. Having said that, investors need to be careful as we navigate heavy issuance, developments in the AI space and various policy announcements, including those related to US monetary policy. Thank you for your attention.
Key points
High single-digit returns are possible in 2026 due to strong carry income and an improving economic outlook.
While inflation remains above the Fed’s 2% target and rate cuts aren’t economically necessary, leadership changes may still drive cuts.
A potential AI bubble burst could spill into fixed income, while unprecedented credit supply may strain demand.