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Key takeaways

Market insights at a glance

In 2026, global fixed-income markets should benefit from improving growth, subdued inflation and reduced uncertainty around tariffs. Inflation is broadly at target and central banks overall are nearing rate-cut cycle ends. We currently favor high-quality spread sectors for building consistent income and are positioned to take advantage of credit opportunities in AI-related issuance, M&A activity, commercial MBS and CLOs.

This quarterly update is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard covering the following:

  • Growth: US growth should stay at or above trend, supported by rate cuts, fiscal stimulus and real wage gains.
  • Inflation: Global inflation continues trending lower, remaining contained across most developed market (DM) economies.
  • Rates: Major central banks have eased policy on disinflation and softer labor markets; the Fed cut 75 bps and the ECB lowered rates to 2%, supporting risk assets.
  • Monetary Policy: Further Fed rate cuts are dependent on labor and inflation data. Additional BoE rate cuts are expected, while the BoJ tightens as real rates remain negative.
  • Credit Markets: Credit spreads are tight but supported by strong corporate and household fundamentals, justifying positioning in spread sectors for consistent income.
  • Labor Markets: US unemployment has risen, but reflects new entrants and re-entrants rather than layoffs; labor supply remains tight due to flat migration.

Fixed-Income Overview and Outlook: Growth, Disinflation and Easing Support Risk Assets

The global fixed-income landscape in 2026 is one of improving growth, continued disinflation and central bank easing that has reduced recession fears while supporting risk assets. Major central banks including the Fed, ECB and BoE have cut rates in response to softening labor markets and declining inflation. Inflation is trending toward central bank targets globally, though the US may see short-term upward pressure from tariff-related costs offset by ongoing services disinflation.

Looking ahead, we expect US yields to remain range-bound with steeper curves, while front-end yields drift modestly lower. Our investment focus centers seeking to generate consistent and reliable income through high-quality spread sectors despite tight valuations that are supported by strong corporate and household fundamentals. Significant opportunities exist in AI-driven capital raising, where high-quality issuers will tap public markets for speed of execution, alongside selective exposure to elevated M&A activity, CLO tranches and improving commercial real estate. EM local rates remain attractive given supportive real yields and central bank coordination.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls.  Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Active management does not ensure gains or protect against market declines.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

Commodities and currencies contain heightened risks that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

WF: 8418409

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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