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Fixed income perspectives: Resilient growth, higher yields and evolving opportunities
KEY TAKEAWAYS
- We believe global economic growth remains resilient despite higher energy prices, geopolitical uncertainty and tighter monetary policy.
- Inflation remains sticky, but current conditions appear materially different from the broad-based inflationary environment that markets experienced in 2022.
- Higher bond yields have improved fixed income valuations and may present attractive opportunities for long-term investors.
Fixed income markets faced a challenging third quarter as interest rates rose across the globe and a combination of factors added upward pressure on yields. Below are the fixed income investment group’s key convictions, with additional portfolio insights available in the downloadable PDF.
We seek to construct portfolios that reflect balanced exposures across excess return drivers against a backdrop of sustained growth, elevated but relatively contained inflation and market expectations for meaningful Federal Reserve (Fed) tightening. We view U.S. duration exposure as favorable given attractive valuations and the possibility that the Fed may not raise rates to an extent that would meet the market’s considerable hiking expectations. After flattening thus far in 2026, the U.S. Treasury yield curve may also face steepening pressure given the potential for rising term premia from elevated fiscal deficits, Treasury issuance and ongoing AI-related capex.
The AI buildout continued to drive U.S. economic growth
Sources: Capital Group, The Bureau of Economic Analysis. As of June 30, 2026.
In our view, structured credit remains attractive as the sector provides high-quality, shorter spread duration carry. Agency mortgage-backed securities valuations have improved after a recent selloff as market-implied interest rate volatility has risen.
We believe that resilient economic growth, healthy corporate balance sheets and strong underlying fundamentals support investment-grade (BBB/Baa and above) and high-yield corporates. While valuations remain tight on average, these sectors continue to offer compelling credit selection opportunities that help diversify sources of carry and should benefit from a supportive growth backdrop.
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Duration is a measure of a fixed income portfolio's sensitivity to changes in interest rates.
Term premia refers to the additional return investors expect for holding longer dated instruments.
Past results are not predictive of results in future periods.
The statements expressed represent perspectives from Capital Fixed Income Investors. The views of individual portfolio managers and analysts may differ.
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