Anne Greenwood, Institutional Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses our view that the Federal Reserve is expected to implement additional rate cuts through 2026 amid a strengthening U.S. economy, driven by consumer resilience, AI investment, and policy stability, while surging AI-related debt issuance may bring volatility to markets.
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Hello and welcome back to The Weekly Fix. It is the second week in December and markets are gearing up to bring 2025 to a close. With only one final Fed meeting standing between now and year end, investors have begun looking ahead to 2026, and this episode will focus on our outlook for the year ahead as well as opportunities and potential risks we are seeing within US fixed income markets.
Starting with this weeks Fed decision, we expect the committee to deliver a hawkish third rate cut to close out the year. As we move into 2026, our view remains constructive on the US economy with expectations for a reacceleration of growth driven by continued strength of the consumer, deregulation, elevated AI-related capex investment, and less policy uncertainty from the Trump administration. We believe this will coincide with continued easing of financial conditions and see up to three more cuts in 2026 as new leadership takes over at the Fed.
Turning to markets, valuations remain tight across both investment grade and high yield. All in yields, however, remain attractive, and a pick-up in volatility and dispersion is providing ample opportunity to add value through idiosyncratic spread compression trades. We continue to believe the overall tighter levels of spreads is in part a reflection of the improving credit quality trends and bolstered balance sheet positions of US corporations.
With that said, the start of the year typically brings seasonally high levels of supply to debt markets. In 2026, we expect this pattern to not only continue, but anticipate even more elevated supply, particularly within investment grade, as a deluge of AI-driven debt issuance could test investor appetite for corporate bonds and spur further concerns about an AI-bubble.
In our view, we believe we are still in the early innings of the AI build out, and unlike the oft referenced dot com bubble, we view the trends in corporate adoption of AI as suggestive of a more sustainable trajectory for the sector. Further, issuers are tapping multiple sources of financing across public, private and securitized markets, which should help to reduce the pressure on any individual one.
The size and scope of these deals, however, even if spread across investor types, is going to be a significant amount for markets to absorb. This will likely lead to shorter term dislocations in both equity prices and credit spreads.
Absent a deterioration in other parts of the US economy, in the form of either an unexpected spike in inflation or a significant softening of the labor market, we believe this should help create value and present a better entry point for investors to re-engage with fixed income markets as secondary spreads reprice wider in anticipation of more supply.
Any way you look at it, it is a fun and opportune time to be an active fixed income investor. We believe credit markets are set to deliver high single digit returns in the year ahead, driven by a combination of attractive carry and potential price appreciation should yields trend lower. We continue to be mindful of the fragility underlying markets, and with generic spread levels remaining tight, are focused on quality, liquidity and having dry powder ready to deploy as these new deals may offer compelling spread concessions.
That is all for this weeks’ episode and thank you for joining us, and have a great rest of the week.
Key points
We expect a hawkish rate cut to close 2025, with additional cuts in 2026 as the U.S. economy reaccelerates.
Attractive yields and increased volatility in tight valuation markets offer value via idiosyncratic spread compression trades, supported by improving corporate credit quality.
Elevated debt issuance tied to AI in 2026 may strain investor appetite and cause short-term equity/credit dislocations, but the sector’s sustainable growth trajectory and diversified financing sources mitigate risks.