Resilient Income
Fixed Income Forward: October 2026
Buy and hold
“The big money is not in the buying or selling, but in the waiting." – Charlie Munger
Key takeaways
- The Federal Reserve’s apparent commitment to controlling inflation makes longer-dated US Treasuries look more attractive while weakening the case for a steeper US yield curve.
- Long-term EU bonds could outperform long-term Bunds due to contrasting supply dynamics, while 30-year Gilts are positioned to outperform other core government bonds.
- Securitised credit is growing strongly in both the US and Europe thanks to continued formation of collateralised loan obligations (CLOs) and regulatory changes for EU insurers.
What happened in September
Government bonds sold off as the US Federal Reserve (Fed) and other major central banks adopted a more hawkish policy stance in response to rising inflation. France came into the spotlight as concerns over the country’s fiscal and political outlook drove the France-Germany 10-year yield spread above 150 basis points, the widest since 2012. After the European Central Bank (ECB)’s second consecutive rate hike, the Fed raised the federal funds rate by 25 basis points to 3.75%-4.00%, as expected, the Bank of England stayed on hold at 3.75%, and the Bank of Japan hiked by 25 basis points to 1.25%, the highest policy rate since 1995.1 Yield curves mostly flattened before partially re-steepening into month-end. Corporate credit spreads widened, particularly among lower-rated issuers. In currency markets, the US dollar strengthened against most G10 currencies except the Japanese yen.
Our take and investment implications
We believe the Fed's commitment to managing inflation is likely to reduce the inflation risk premium embedded in longer-dated bonds. That means longerdated US Treasuries are no longer an obvious underweight. The working assumptions that had supported US yield curve steepening now appear less compelling. For one, the Fed's unanimous decision to raise rates at the September meeting highlights its commitment to inflation-fighting. The likelihood of a Democrat clean sweep or a divided Congress following the US midterm elections also suggests a less activist fiscal expansion. The US Treasury has shown greater willingness to support the long-end of the yield curve through expanded buyback operations.
In Europe, we continue to prefer yield-curve and cross-market positions over taking outright duration risk. Fiscal support to cushion the blow from higher energy prices could help push up long-end yields. We expect a combination of a data-dependent ECB, policy rates priced above the perceived neutral range, and elevated German debt issuance to contribute to a steeper German yield curve. EU bonds continue to offer value given their AAA rating and declining net supply into 2027. Accordingly, we are positioned to profit from 30-year EU bonds outperforming same-maturity German Bunds. In the UK, we think the monetary policy stance is already restrictive against the backdrop of subdued economic growth, ongoing core disinflation and tight financial conditions. Combined with tight fiscal policy and attractive valuations, these factors suggest 30-year UK Gilts could outperform other core government bonds.
In corporate credit, spreads in the lowest rated segments have widened meaningfully, with US high yield rated CCC or lower offering a yield pick-up of 12.5% above Treasuries, up from around 8.2% a year earlier (source: Bloomberg, October 2026). Whether weaker issuers will succeed in absorbing debt-servicing costs once they refinance low-interest legacy debt at higher rates will depend on their pricing power to pass inflation onto customers – and whether real (inflationadjusted) earnings growth remains positive and stays ahead of nominal debt.
Spreads for the higher-rated segments of global credit markets are telling a different story as they are only modestly wider by about 25-30 basis points yearto-date. Behind this resilience we still see solid issuer balance sheets, steady investor demand, limited net new supply and continued formation of collateralised loan obligations (CLOs). We think US dollar high yield credit now offers a compelling mix of high coupon income and low duration and default risk. Meanwhile, floating-rate exposure remains a key ingredient for strengthening fixed income allocations, with investment-grade floating-rate notes and CLOs being our preferred exposure. An AA-rated CLO may offer a yield pickup of more than 100 basis points based on a more diversified pool of underlying credit assets than a single corporate bond carrying the same rating. This is not just a US story. European securitised credit has seen record levels of issuance this year, driven by banks and other loan originators securitising more of their mortgage and consumer loan books. We anticipate investor demand to stay strong, particularly since Solvency Capital Requirement reforms taking effect in January 2027 will reduce capital charges on EU insurers’ high-grade securitised credit holdings
CHART OF THE MONTH
Source: Allianz Global Investors, Bloomberg, ICE BofA, and MSCI indices, as at 30 Sept 2026. Yields in US dollar terms.
Bond yields have reached levels that make it seem attractive to buy and hold bonds to maturity, while worrying less about forgoing even higher yields from now on. In crude terms, the anticipated cumulative return of buying today and holding to maturity 10-year US Treasuries is in the region of 67%. Yields also appear high enough to provide a significant margin of safety before bondholders suffer paper (unrealised) losses. US interest rates would need to go up by another 225 basis points or more for high yield corporate bonds to lose money at the global index level on a 12-month horizon (assuming stable credit spreads). At the same time, dividend income payouts, in percentage terms, are being sucked out of equity markets as stock prices have increased – a trend driven by tech giants reinvesting profits into AI rather than returning money to shareholders.
FIXED INCOME FORWARD | WHAT TO WATCH
- Saudi Arabia
A series of deadly attacks on Saudi Arabia by the Yemen-based Houthi rebels is opening another front in the Middle East conflict that risks continued oil price volatility. In a scenario where energy prices stay at current levels through 2027, inflation is likely to stay above target in many advanced economies while economic growth could take a hit, raising the risk of “stagflation”, particularly in the eurozone. - Eurozone debt
After the sell-off in French government bonds that spread into other eurozone bond markets, we saw a recovery led by Italian bonds. This was partly attributed to the Italian prime minister securing a key vote for electoral reform that offers the prospect of more stable majority governments. In France, any lasting recovery in yields is tied to the politics of next year’s presidential elections. - Corporate earnings
Reporting season is beginning and analysts are forecasting quarterly earnings in the S&P 500 equity index to rise more than 25% year-on-year, driven by the AI infrastructure boom. That would mark the third consecutive quarter of above-25% earnings growth. Outside of AI and energy, results for the third quarter are expected to be tempered, especially in Europe and in more cyclical and rate-sensitive sectors.
FIXED INCOME MARKET PERFORMANCE
Source: Bloomberg, ICE BofA and JP Morgan indices; Allianz Global Investors, data as at 9 October 2026. Index returns in USD-hedged except for Euro indices (in EUR). Asian and emerging-market indices represent USD denominated bonds. Yield-to-worst adjusts down the yield-to-maturity for corporate bonds which can be “called away” (redeemed optionally at predetermined times before their maturity date). Effective duration also takes into account the effect of these “call options”. The information above is provided for illustrative purposes only, it should not be considered a recommendation to purchase or sell any particular security or strategy or as investment advice. Past performance, or any prediction, projection or forecast, is not indicative of future performance. Index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.
1 Source: European Central Bank; US Federal Reserve; Bank of England; Bank of Japan. October 2026.
