Fixed Income Monthly - February 2026

The Fixed Income Monthly provides a forward-looking summary of the medium-term views from Fidelity’s Fixed Income team. Our investment approach is multi-strategy, with portfolio managers given clear accountability and fiduciary responsibility for all investment decisions in a portfolio. Given this portfolio manager discretion, there may at times be differences between strategies applied and the views presented in this document. We believe in managing portfolios with a mix of active investment strategies, including top-down and bottom-up, such that no single strategy dominates risk.

Outlook

Disruption and uncertainty loom over the US once again after a cold weather snap and political divisions. Temperatures in the US, particularly on the East Coast, have plunged far below typical January levels and it is forecast for this to continue into February. In 2025 we saw a far less dramatic drop in temperature which cause a 0.9% month-on-month drop in retail sales in the US, we expect this to be greater in 2026. Now yields have reached 4-month highs, we have reduced our US duration underweight, on the expectation for softer economic data, and on the back of recent cheapening. In the medium-term we still expect stronger US GDP growth.

Tenth avenue freeze-out: NYC temperature seasonality

After the government shutdown in late 2025, key economic data was omitted from publication which had a significant impact of the market’s assessment of economic growth and inflation. We are now in a similar, but less severe, government shutdown as Democrats look to block further funding agreements in light of ICE shootings in Minneapolis. While this does not impact as wide a range of departments as before, it does impact key agencies like the BLS, which provides inflation data. With CPI data at risk of coming in softer due to data collection issues rather than underlying fundamentals, and a new Fed chair, Kevin Warsh, likely to be more responsive to the president’s push for rate cuts, we favour curve steepener positions. GDP growth is tracking at 5.4% according to Atlanta Fed and inflation is (for now) relatively stable, so rate cuts are likely to throw fuel on to an already hot fire. Ultimately, this further undermines the credibility of US institutions and raises inflation risk premia, both are bad for the long end of the curve, even if we see rate cuts in 2026.

USD reserves are still the status quo

Dislike for US Treasuries is part of a broader trend in US debasement, where assets from the world’s largest economy are increasingly out of favour. We have been saying this for over a year, one of our favoured expressions of this view is to be short USD.

Despite market narratives changing in the past year, USD assets are still the ‘status quo’ for most institutions. In the chart above, we can see that holdings of USD-denominated securities (adjusting for exchange rates) are still well-above their early-2000s highs, and even at levels seen before Trump 1.0. This tells us that selling and hedging of US dollars has plenty of room left to run.

We continue to prefer Norway and LatAm for both currency and rates exposure, trading on high real rates and relative cheapness in FX. On the flip side we see expensive, low carry from US credit – so we are outright short here as a result.

Outlook

Global IG credit returned 0.5% in January with spreads rallying overall, despite the end of the month widening. Spreads in major indices have remained compressed, pointing to rich valuations relative to long-term history even as fundamentals remain broadly stable. We remain underweight credit risk, while focusing on maintaining carry, given the constrained potential for further spread tightening and asymmetric downside risk.

Demand remains very robust in credit markets as yield-buyers are still capitalising on attractive all-in yields on offer. At the same time, we expect to see increased supply which could also be a catalyst for spreads to widen if the market has difficulty absorbing this level of volume. Furthermore, the energy sector may present opportunities to buy high quality names at attractive levels given the market currently expects oil prices to continue to fall. Our defensive positioning will enable us to be nimble in switching holdings to take advantage of volatility and mispricing.

Seasonality points to increased issuance ahead

US investment grade credit returned 0.4% in January, supported by a 4bps tightening in spreads. Valuations remain expensive and offer limited margin for error, reinforcing a disciplined approach to credit risk. We maintain a medium conviction underweight to US IG credit. Corporate issuance continues to expand rapidly as companies refinance and fund AI-related capital expenditure, led by large technology issuers. While strong all-in yields continue to support primary market demand, sustained technology supply is likely to pressure spreads, particularly at the long end of the curve, leading us to prefer expressing risk through rates rather than adding credit beta at current valuations.

IG spreads (bps) remain rich by historical standards

Euro IG credit returned 0.8% in January with spreads tightening 5bps. We remain underweight credit beta given tight valuations. We expect elevated EUR corporate supply, including increased spillover from US issuers accessing the euro market as USD market absorption becomes more constrained. This supply backdrop limits the scope for further spread tightening. Tactical opportunities may arise selectively, particularly in euro-denominated issuance from high-quality US technology issuers where material new-issue concessions are offered, especially in long maturities.

Sterling IG credit returned 0.3% in January with spreads tightening by 3bps. We remain cautious, with a focus on carry and roll-down from short-dated, attractive yielding credits. However, we think risks are also increasingly asymmetric. Credits are likely to face higher volatility, with our base case pointing to modest spread widening.

Asia IG credit returned flat in January with spreads marginally tighter. The focus has shifted to active rebalancing rather than adding beta at current spread levels. Higher net issuance and fading technical tailwinds argue for a more neutral stance, supported by selective participation in attractively priced primary deals.

Outlook

Global HY delivered 0.7% in January, with spreads flat, supported by carry, but increasingly shaped by regional and sector divergence. AI-related disruption is emerging as a global theme, driving differentiation across credit markets. Amid tight valuations and rising dispersion, we have moved from a slight positive to a neutral stance on Global HY, with limited scope for broad-based beta-driven returns and selectivity remaining critical.

US HY posted 0.5% in January, with spreads 7bps wider. Markets remain underpinned by supportive monetary and fiscal policy and broadly stable corporate fundamentals. Underlying credit metrics remain close to historical medians, although momentum has slowed and dispersion continues to rise, with a stubborn tail of issuers lacking a clear path out of distressed territory. Issuance remains predominantly refinancing-led, though early signs of more aggressive uses of proceeds warrant closer scrutiny.

US HY: Issuance by use of proceeds

The risk backdrop has become more complex, with increasing AI-related disruption, elevated commodity price volatility and geopolitical uncertainty adding to potential sources of idiosyncratic stress. Following an extended period of strong returns, tighter spreads leave less room for error, and we have shifted in from positive to neutral in US HY. We maintain a focus on higher-quality issuers and disciplined credit selection, particularly within the B and CCC segments where avoiding asymmetric downside risks remains critical.

European HY delivered 0.8% in January, with spreads 11bps tighter as supportive technicals and a buy-the-dip mentality kept valuations near multi-year tights. Despite spread tightening, yields remain attractive, supporting demand from yield buyers and underpinning ongoing inflows. Issuance remains predominantly refinancing-led, supporting orderly market conditions despite an active primary backdrop.

Looking ahead, dispersion across ratings and sectors is set to remain a defining feature of the market. Differentiation between AI winners and losers is becoming more evident, with early pressure in parts of the software sector, while creditor-on-creditor violence remains a key risk for weaker capital structures amid limited sponsor support. However, elevated carry, low duration and supportive technicals underpin our slightly positive stance on European HY, with returns likely to remain carry-led and driven by disciplined credit selection rather than further spread tightening.

EHY: Spreads tight but yields still supportive

Asia HY delivered 1.7% in January, with spreads 27bps tighter. Returns were driven primarily by idiosyncratic factors rather than beta. Volatility persisted around selected China property issuers, although the reduced weight of this segment has limited broader market impact. Outside property, fundamentals remain broadly resilient. We maintain a neutral stance on Asia HY, recognising attractive carry and an improved index composition, while emphasising disciplined credit selection and caution towards weaker and debut issuers where downside risks remain asymmetric.

Outlook

Emerging market debt generated positive returns in January, supported by a constructive backdrop. While, EM credit spreads continued to modestly tighten, higher US Treasury yields constrained hard-currency total returns. In contrast, local currency assets benefited from positive FX contributions amid a softer US dollar and broadly easing global financial conditions.

In early January, US forces captured Venezuelan president Nicolás Maduro in a targeted operation. Vice President Delcy Rodríguez took over as interim president, prompting a rally in Venezuelan bonds, as markets anticipated a path towards an eventual restructuring of external debt. However, spillovers into the broader EM debt market have been limited. Tensions around Iran are also elevated amid ongoing negotiations and military readiness with the US deploying significant naval assets to the region. Overall, geopolitical developments are an on-going risk, but spikes in risk premiums have quickly faded in January.

Dispersion in commodity prices offer opportunities

Hard-currency sovereign markets are well supported, underpinned by higher commodity prices and a weaker US dollar. Market fundamentals and technicals were constructive, with primary market activity buoyant across high yield and investment grade issuers. In several cases, renewed access to external financing improved near-term liquidity positions and prompted spread tightening. Ecuador was an example where issuance activity alongside liability management coincided with a double-notch rating upgrade by Moody’s. That said, index-level valuations appear increasingly tight, and not all new issues or structures performed well. A sustained pace of HY issuance could present technical challenges through the year, reinforcing the importance of selectivity. Overall, while the environment is supportive, returns are increasingly driven by selective exposure rather than market beta.

Local-currency duration continued to offer opportunities, supported by elevated real yields and credible monetary policy frameworks in several markets. Latin America offers more compelling opportunities, while Asian yield curves tend to be flatter and overall levels offer more limited repricing potential. Colombia is an idiosyncratic case, where recent policy tightening aimed at re-anchoring inflation expectations should reinforce central bank credibility. A softer US dollar reduced external constraints, thus supporting policy flexibility and helping to stabilise inflation dynamics, but with elections on the near horizon, volatile trading conditions are likely to persist.

US dollar weakness supports local market returns

EM currency performance was supported by a broadly weakening US dollar, still supportive global liquidity conditions and the strong rally in metals prices. Higher-carry and commodity-linked currencies benefited from this backdrop. A softer USD has eased constraints on several EM central banks, notably in North Asia, while reinforcing a more dovish bias in parts of Central and Eastern Europe. We maintain a positive yet selective stance on EM FX.

• Fixed Income Monthly - January 2026
• Fixed Income Monthly - December 2025
• Fixed Income Monthly - November 2025
• Fixed Income Monthly - October 2025
• Fixed Income Monthly - September 2025
• Fixed Income Monthly - August 2025