From Anders Persson, Chief Investment Officer, Head of Global Fixed Income, Nuveen
Economic resilience: Spreads are tight, but still scope to take credit risk
Underlying our 2026 investment outlook is a fundamentally constructive view of global growth prospects. Our long-held view of no recession over the medium term remains intact. Although headwinds remain, they are more than offset by fresh areas of strength. We believe credit spreads across markets are tight by historical standards, but fair for the current environment. As a result, we recommend maintaining a modestly risk-on exposure across asset classes, specifically in areas like preferred securities, high yield corporates, broadly syndicated loans, and middle market loans.
Across developed markets, including in the U.S., Euro area, and Japan, we anticipate faster growth in 2026 compared to 2025. Global inflationary pressures, which remain complicated by ongoing tariff uncertainty, have nonetheless continued to moderate. We estimate that inflation across developed markets has fallen to around 2.5% year-on-year, down from a peak of over 5% in 2023 and now is within striking distance of the conventional 2% target. That deceleration, which has supported disposable incomes and consumption growth, is set to strengthen further next year.
At the same time, a new tailwind has emerged from business investment. Tech infrastructure investment, which we estimate has driven ~20% of headline U.S. GDP growth in 2025, is set to remain elevated. There is also scope for better productivity growth from the wider deployment of AI tools across the workforce. Nonfarm output per hour of work has grown at an annualised rate of 2.2% since Q3 2022, or since AI implementation started in earnest. Excluding COVID-driven distortions, that is the fastest pace of productivity growth since 2011.
Downstream of the positive consumption and investment environments, strong corporate fundamentals are poised to continue. In other words, balance sheets are healthy. For example, in BB-rated corporates, average debt-to-EBITDA levels are lower than pre-COVID, and interest coverage ratios are higher. At the same time, valuations are rich by historical standards. Credit spreads for BB-rated corporates are inside 200 bps, which ranks in the 92nd percentile of spread levels over the last 20 years. However, historically, credit spreads often remain “tight” for years at a time. Investors who prematurely de-risk solely due to valuations tend to underperform after years of missed income.
Accordingly, we favor taking risk in exactly those segments which combine strong fundamentals with reasonable spreads. Higher-rated segments within asset classes do not offer enough income to be compelling, while lower-rated segments are too at-risk from unforeseen shocks. The up-in-quality segment of below-investment grade markets, in high yield corporates, broadly syndicated loans, and middle market lending, is the sweet spot.
- Actions to consider:
- Maintain modestly risk-on exposure in preferreds, high yield and senior loans.
- Focus on higher-quality segments within the below-investment grade markets.
Also read: A Window Into The World of US Private Credit
Developed markets borrow from the emerging market playbook
A notable shift in the 2026 landscape will be the narrowing of the gap between developed markets (DM) and emerging markets (EM) in terms of macro stability, institutional credibility, and policy predictability. Questions that investors once reserved for emerging markets – around political continuity, central bank independence, and the durability of fiscal and institutional anchors – are increasingly relevant across major developed market economies.
Political transitions in France and Japan, alongside the change in Federal Reserve leadership when Chair Powell’s term ends in early 2026, introduce a degree of uncertainty at a time when global term premiums have already risen. Meanwhile, continued adjustments to global supply chains, elevated geopolitical tensions, and a more fragmented trade environment mean that DM economies face structural forces that look increasingly similar to the challenges traditionally associated with EM.
At the same time, many EM economies have strengthened their fundamentals. Earlier and more decisive monetary tightening, healthier balance sheets, and more credible policy frameworks mean EM assets are entering 2026 from a position of relative stability.
For investors, this convergence argues for applying a more EM-style analytical framework to DM issuers: assessing political and institutional risks as part of the overall credit, rates, and currency outlooks. It also supports selective allocations to areas insulated from sovereign-level volatility, such as securitised credit, municipals, and infrastructure, while recognising that high-quality EM debt may offer diversification benefits traditionally associated with DM.
- Actions to consider:
- Assess political and institutional risks in both DM and EM allocations.
- Favor sovereign-insulated assets like securitised credit, munis, and select high-quality EM debt.
Time for a takeover: Fiscal over monetary policy
In 2026, fixed income markets will be shaped by the influence of fiscal policy, rather than monetary policy. While central banks across developed economies are nearing the end of their rate-cutting cycles, fiscal trajectories remain far more variable. Elevated deficits, ageing demographics, and sustained commitments to defense, industrial policy, and the energy transition mean that fiscal settings will exert an important influence on growth, inflation, and term premiums over coming quarters and years.
Across the U.S., Euro area, and Japan, governments are set to maintain relatively expansionary fiscal positions. Coming at a time of already-elevated debt levels, wide fiscal deficits threaten to put further upward pressure on term premiums across most government bond markets. Though central bank policy may be entering a new, more-predictable environment, investors will need to assess not only the path of policy rates but also the credibility and medium-term sustainability of fiscal plans. One bright spot in our forecast is the U.K., which we expect to proceed cautiously with both monetary and fiscal adjustments, adding further differentiation within developed markets.
For fixed income investors, the shift toward fiscal dominance argues for selectivity along the curve and across sovereign markets. Rather than extending duration aggressively, we see value in positioning for moderately steeper curves, an environment supportive of sectors with structural demand or lower sensitivity to sovereign supply dynamics. Securitised credit, municipal bonds, and high-quality credit remain well supported, while careful attention to sovereign issuance patterns and fiscal frameworks will be increasingly important.
- Actions to consider:
- Position in sectors with structural demand less exposed to sovereign supply pressures.
- Stay selective on duration, favoring curve steepening over aggressive extension.
