Q2 2026 Asset class outlook: Global fixed income

By: MFS Investment Management

As part of our Asset Class Outlook series, our sub-advisor MFS Investment Management (MFS) shares its views and perspectives on the global fixed income space for the second quarter of 2026^.[1]

The outlook for global fixed income remains broadly constructive, but macro volatility, policy divergence, and geopolitical complexity reinforce the need for a global approach. Rebalancing away from the U.S. and embracing global credit and emerging markets (EM) debt may help enhance risk-adjusted returns and resilience in portfolios.

U.S. duration

While the timing of rate cuts has been delayed, investors anticipate two more in 2026. In a low-hire/low-fire labour market, the U.S. Federal Reserve may be biased toward preventing further labour market deterioration. Recent Consumer Price Index (CPI) data has been mild, but ongoing tariff changes may undermine that. Another complication has been the recent spike in oil prices, due to the ongoing conflict with Iran. Overall, MFS remains neutral on Treasuries, though duration may help bolster portfolios if labour markets weaken.

Euro zone duration

The European Central Bank’s (ECB) easing cycle has largely ended, but moderating inflation and fiscal expansion - especially in defence and infrastructure – support a recovery in growth. The recent spike in oil prices has pushed the market to start pricing in potential rate hikes by the ECB, which MFS believes, is unreasonable at this juncture. Against this backdrop, the case for long European duration has strengthened.

U.S. investment grade (IG) corporates

Fundamentals remain respectable due to recent margin and free cash flow improvements. MFS believes that spreads remain near historical tights, however. Strong fund flows have helped support rich valuations; but escalating issuance to fund the AI infrastructure buildout could challenge technicals later in the year. MFS remains favourable toward U.S. IG, preferring higher quality asset classes with spreads tight everywhere.

U.S. high yield (HY)

HY fundamentals are solid, with leverage and interest coverage near long-term averages. Other positive drivers include low default rate projections, strong fund flows, and a supportive macro outlook. However, spreads remain quite tight. The risk/return proposition leaves MFS underweight due to richly valued spreads. MFS prefers sectors such as financials while steering away from secularly challenged industries.

Europe IG & HY

Both segments benefit from strong fundamentals and fiscal expansion, particularly in sectors like defence and utilities. Tight spreads driven by robust technicals leave MFS defensively biased. While break-even yields remain attractive, dispersion at the security level makes credit selection essential.

Emerging markets debt

EM offers compelling yield valuation and resilience, despite higher fiscal risks and global uncertainties. Country selection is crucial, as EMs are exposed to geopolitical and policy risks, but strong macro fundamentals and a weaker U.S. dollar indicate favourable economic conditions.

Conclusion

Global diversification remains essential in the period ahead to navigate volatility and capture opportunities across regions and sectors.

^[1] Data and views as of March 31, 2026 unless otherwise noted.

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