Andrzej Skiba, Head of BlueBay U.S. Fixed Income, discusses how the team sees opportunities in selective sectors while maintaining a cautious approach, anticipating strong returns in 2026 amid rate cuts and US growth acceleration.
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Welcome to the latest edition of The Weekly Fix. My name is Andrzej Skiba.
It’s been a strong year for fixed income returns so far. Across the BlueBay fixed income team in the US, we’ve done well navigating a volatile environment over the course of the year. However, now that the market has rallied hard, clients are asking whether there is any value left in the asset class. With this in mind, we wanted to highlight our current thoughts about portfolio positioning as well as preview our thinking for 2026.
When it comes to US interest rate exposure, we remain of the view that a curve steepener is the best way to express a view on the space. This trade works well in several scenarios. In our opinion, you’d have to see a major drop in inflationary pressures combined with a much lower-than-expected US fiscal deficit to see it materially underperform. Neither of these represent our base case scenarios. We also see the front-end of the curve as a good place to hide, however prefer an entry point quite a bit above the current 3.5% context, looking at 2y Treasury yield levels. We struggle to see a world, where Treasury yields fall materially further out the curve since the US deficit remains elevated, running well above 6% and Treasury issuance is heavy, even if some supply is redirected from the back end of the curve.
In corporate credit, generic spreads are unappealing, and we passionately believe it’s an awful time to go passive as you essentially lock in plenty of bonds at multi-year spread tights. Instead, we find value in idiosyncratic sector themes, like California utilities or chip manufacturing in US Investment Grade or positioning for an improvement in US housing across US High Yield (HY). We also like compression themes, i.e. going down the capital structure of strong issuers. We often find that junior subordinated debt not only offers a meaningful spread concession compared to senior bonds of the same issuer but also compares well to generic HY offerings. Many of these structures also offer coupon floor language, which materially reduced the risk of securities not being called in the future, something US investors are likely to value more as rate cuts unfold over the coming quarters.
In the securitized space, generic MBS (mortgage-backed securities) spreads don’t seem too appealing to us and we see a consensual manager overweight as an impediment to strong performance. We also loathe to lock in current valuations across mezzanine tranches of many ABS and non-agency MBS offerings. Not all is lost, however, as we see value in the fast-growing data center and fiber securitization spaces and expect that secular theme to have legs for some time to come. We’re also watching with interest developments in both consumer and sub-prime auto spaces, where following a demise of Tricolor, price action has become more erratic, and we expect the market to throw the baby out with the bathwater. As we look for investment opportunities, we do want to stress, however, that there is absolutely no room for complacency, especially when it comes to esoteric, untested business models.
Finally, while it’s a bit too early to share our detailed perspectives for the year ahead, we can preview some of our thoughts. Assuming our base case scenario of multiple rate cuts and of US growth acceleration beyond 2% in 2026, we see a good chance of high single-digit asset class returns in both investment grade and high yield on a forward twelve-month basis. That’s not counting any alpha we could generate over the period. While the drivers of each asset class could be somewhat different, both represent solid returns by historical standards and call for remaining invested in US fixed income. We look forward to explaining our outlook in more detail in future Weekly Fix recordings.
Thank you for your attention.
Key points
We favor a curve steepener for US interest rate exposure, expecting resilience unless inflation drops significantly, or fiscal deficits shrink unexpectedly.
Generic corporate credit spreads are unappealing, prompting a focus on idiosyncratic themes like California utilities, chip manufacturing, and US housing.
Assuming multiple rate cuts and US growth above 2%, we anticipate high single-digit returns in investment grade and high yield fixed income.
The team emphasizes staying invested while remaining cautious about esoteric or untested business models.