Fixed Income Monthly - March 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

After a significant escalation in the Middle East, with the US and Israel launching attacks on Iran, the conflict has spread across the region. From a markets perspective, the first-order impact has been on oil, which is facing a supply squeeze given the Strait of Hormuz, responsible for 20% of global oil in transit, has become impassable.

Crude oil futures prices have spiked since the onset of war. This supply shock and increase in risk premium has second-order impacts across rates, inflation and currencies.

Oil drives a large portion of energy prices, which are a core component of inflation. We have had longstanding positions that protect us from rising forward inflation expectations. We have since added to these as we still feel the level of risk priced into US and UK inflation swaps is too low.

On rates, rising inflationary pressure typically pushes markets to expect more hawkish central bank behaviour. As a result, bond yields tend to rise, which is bad for duration positioning. At the headline level, we have reduced duration risk for this reason.

Simple model of US rates, oil and the economy

A simple model of WTI oil prices and the Citi Economic Surprise Index can explain a large portion of the moves in 5-year Treasuries since mid-2023. But recently this relationship has decoupled, with Treasuries falling under dovish expectations. As a result, we are keen to stay underweight in US duration.

An oil shock is bad news for energy importers, including most of Asia and Europe, so their currencies are likely to weaken against the US dollar. We have reduced our USD short positioning as we expect to see some short-term strength. Valuation-wise, we have a bearish medium-to-long term outlook on USD versus EM FX, but we could see some more strength in the short term.

We remain short Sterling, which funds long positions in BRL, CHF and NOK. Rising energy prices are likely to weaken the UK’s term of trade, given its reliance on energy imports. We also see rising unemployment in the UK with only one 25bps rate cut priced this year, which could be insufficient. Instead of a long duration position, which presents the risk of Gilts selling off due to fiscal uncertainty, we prefer to be short GBP.

Where is the volatility in rates and equities?

Elsewhere, risk assets have long been priced for perfection, where equity and credit valuations appear to assume little-to-no material risks. We have started to see some of this unwind, with falling equities and widening credit spreads. But these assets are still historically rich and could be subject to further cheapening.

We have been short US and European credit spreads for over a year, given little opportunity for value compared to government bonds. The negative carry we pay to protect ourselves from a selloff is relatively cheap as markets are currently pricing little volatility in credit. This is also a cheap hedge against our risk-on positioning in EM local currency debt.

Outlook

Global IG credit returned 1.1% in February with spreads widening by 10bps overall. Government bond yields rallied amid a moderate sell-off in risk assets which supported the total return profile of investment grade credit.

We are broadly underweight credit risk across our funds as spreads remain tight compared to history. This means that the risk-return profile from being overweight credit risk is asymmetric and skewed to the downside. 

Credit spreads are still priced for perfection

Our defensive starting point within our funds should enable us to outperform during any future wobbles in risk assets. We will also be able to take advantage of any significant spread widening to step back into the market at more attractive valuation levels.

US investment grade credit returned 1.3% in February, with spreads widening 11bps. We are still seeing little concession in new issuances, which we expect to lead to a period of market indigestion.

Fears shifted away from overinvestment in AI capex towards AI disruption. Industries with a perceived higher exposure to being replaced by AI agents such as insurance, asset managers and software companies (included within technology) saw their spreads widen significantly. This followed a report from Citrini Research exploring a hypothetical future scenario where AI is able to alleviate frictions in the economy, which reduces dependence on these companies.

We are steering clear of issuers with private credit exposure as it is exposed to highly levered software companies, which have close to zero recovery value in the event of default. Our underweight here includes business development companies, which we think still have room for further spread widening.

Weakness in sectors exposed to AI disruption

Euro IG credit returned 0.5% in February with spreads widening 9bps. Although spreads have widened slightly over the month, they remain close to all time tights. As such, we are maintaining our underweight to credit risk as we expect some further widening.

We also think that credit spreads are still priced for perfection and generally offer insufficient compensation for additional risk. This means that we still have a preference for high quality, defensive issuers.

Sterling IG credit returned 1.3% in February with spreads widening by 11bps. We are seeing lots of volatility in individual names, especially within the technology sector. In our view, this reinforces the value of bottom-up research and active management as we are in a credit picking market.

Asia IG credit returned 1.3% in February with spreads widening 5bps. The market has remained reasonably calm, and new issue performance YTD has been strong.

Outlook

Global HY returned 0.3% in February, with spreads widening by 20bps, as AI-related uncertainty increased dispersion across regions and ratings. More recently, market focus has shifted to geopolitical escalation, although AI remains a structural theme for leveraged finance markets. Lower-quality spreads have begun to widen and issuance remains elevated, signalling more selective risk appetite.

With valuations still tight, we maintain a neutral stance on Global HY, expecting returns to be primarily income-driven rather than supported by further broad-based spread compression.

US HY posted 0.2% in February, with spreads widening by 24 bps. Concerns around AI-related disruption and mixed Q4 earnings increased dispersion, with higher-quality credits outperforming and CCC-rated bonds lagging. Technology exposure in US HY is approximately 4%, well below leveraged loans (mid-teens) and private credit or BDCs (over 20%), limiting systemic risk, though single-name volatility remains elevated.

US HY: BB vs CCC spread divergence

With spreads near the tighter end of historical ranges and yields at 6.8%, compensation for risk appears limited. Market technicals remain stable, and distressed levels have not materially increased. Given tight valuations and asymmetric downside risks, we maintain a neutral stance on US HY.

European HY posted 0.3% in February, with spreads tightening by 17 bps. Returns were supported by carry and resilient technicals, although dispersion remained elevated amid tariff uncertainty and volatility in parts of the software sector. Geopolitical escalation in the Middle East has triggered a renewed risk-averse move, with oil prices rising and investors shifting toward safe-haven assets. European risk assets have repriced amid concerns over potential supply disruptions through the Strait of Hormuz, weighing on airlines, cruises, shipping and chemicals. Fund flows remain orderly, although spreads are starting from relatively tight levels.

Given elevated geopolitical uncertainty, ongoing AI repricing and rich valuations, we have moved from positive to a neutral stance on European HY. Technical conditions remain supportive, but upside from current levels appears constrained relative to downside risks. We expect returns to be primarily income-driven, with performance increasingly dependent on selective positioning rather than broad-based spread tightening.

EHY: Issuance and net supply trends (€bn)

Asia HY returned 0.9% in February, with spreads tightening by 26 bps, supported by carry and constructive technicals. Geopolitical escalation in the Middle East has become a key external risk, primarily through higher oil prices and their impact on inflation, trade balances and growth across energy-importing economies. While spreads have remained resilient, elevated uncertainty and relatively tight valuations support a neutral stance.

Outlook

Emerging market debt generated positive returns in February. Declining US Treasury yields provided a supportive backdrop for hard currency assets, although spread widening limited overall gains. Local markets benefited from currency appreciation earlier in the month, while carry remained an important contributor.

Tensions intensified following US and Israeli strikes on Iran, prompting retaliatory actions across the Gulf and renewed disruption risks around key shipping routes, including the Strait of Hormuz. The rise in oil prices and a shift toward risk aversion added a geopolitical premium to EM assets and increased volatility across rates and FX markets.

Sovereigns outpaced corporates as lower core yields offset wider spreads, while country-specific developments drove relative returns. Structural arguments in favour of EM debt remain intact, including improving policy credibility and still-supportive growth differentials, yet near-term positioning appears stretched: selective FX allocations are elevated, rate markets discounting policy easing and credit valuations screen rich.

While higher oil prices strengthen the fiscal outlook for wealthier Gulf exporters, we have stayed cautious on lower-rated regional issuers. As risks mounted, we became more cautious in more exposed local markets such as South Africa and Mexico.

EM spreads remain tight despite recent uptick

In this environment of heightened uncertainty and richer valuations, we are prioritising quality, liquidity and flexibility. We have moved to a neutral stance in hard currency sovereigns, focusing on selective opportunities rather than broad beta exposure and favouring issuers with resilient balance sheets and reliable market access. A similar approach applies to EM corporate credit, where carry remains supportive but spreads offer limited room for further compression.

Across local markets, inflation has moderated in many economies, although higher energy costs present upside risks, particularly for net importers. Central bank credibility and still-attractive real yields provide a degree of support, yet much of the anticipated easing cycle is reflected in current pricing. We have therefore shifted to a neutral overall position in local duration, maintaining targeted exposures while avoiding markets where the balance of risks appears skewed.

EM FX retraces lately as geopolitics drive volatility

EM currencies were supported earlier in the period. Later, as tensions intensified, volatility increased amid geopolitical developments and intermittent US dollar strength. We have reduced long EM currency exposure and trimmed short US dollar positions, moving toward a more diversified funding basket that includes euros.

We prefer currencies with robust fundamentals and sustainable carry, while we remain cautious on those vulnerable to policy intervention or capital controls. A disciplined, selective stance remains appropriate in the current environment.

• Fixed Income Monthly - February 2025
• 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