2026: what’s ahead for global bonds?

Kaspar Hense, Senior Portfolio Manager for Investment Grade, discusses why the outlook for global bond markets in 2026 is actually quite exciting!

Net issuance for bonds is set to remain high in 2026

While we expect the Fed to restart QE (which is not-meant-to-be-called QE) and the DMO to significantly reduce net supply in the UK, both of which should curb global government supply somewhat, global corporate net supply will increase by around USD200 billion. This will be predominantly due to tech companies financing their ongoing AI investments.

Interestingly, these companies are also the largest holders of the US money market, and through investing more heavily, not only could they take on more of a media/utility debt structure in the future, but it also reduces demand for US bills, of which there are currently plenty.

This has been part of the so-called repo crisis we have observed recently, and which has led the Fed to end QT prematurely. It should not be seen as a sign of concern for markets when there is such an easy fix, but it begs the question (combined with the Fed still running a negative equity balance) as to how restrictive monetary policy in the US really is. Indeed, it leaves the market to wonder if the Fed has really have walked the last mile.

Going into next year, predictions platform Polymarket is expecting the next Fed chair to be Kevin Hassett, who is known for taking short cuts. This was the case in the late 90s, when he announced a Dow target of 36,000…which in the end happened some 25 years after his recommendation. Hopefully he will be timelier as the next Fed chair!

We’ve seen huge divergence in global bond markets due to supply-demand imbalances

The long ends, in particular, have performed very differently across countries and regions of late. While we expect most of these trends to continue, we also see significant opportunities to arise from trends that aren’t driven by fundamentals. The forward curve has opened up opportunities not seen for some 25 years in the rates space. This is exciting compared to the last decade, when the only trick was to find the last positive yield in some 100-year Austrian bonds!

It’s striking how much better the US has performed in the 10+ sector in 2025

This has been due to two primary drivers:

• The US pension system is equity focused and less regulated, while Japan, Europe, and the UK have been forced to be mostly duration matching liabilities. With the Netherlands shifting from a defined benefit to a defined contribution system, Dutch pension funds are expected to sell some 300 million DV01 over the next two years, which is reducing long-end demand. In Japan, flows into the sector are now reversing, with baby boomers having started to retire.
• The US Treasury has been much more responsive and active. While in Japan the DMO has only marginally shifted its duration profile, and in the UK the BoE is still selling bonds at a loss, the Treasury under Bessent has put a strong focus on the long end to reduce mortgage costs (which are linked to the long end) by reducing long end issuance.

Significant changes to Basel 3 requirements in the US are expected in the coming years

Lower capital requirements, leverage ratio requirements, and countercyclical buffers should free up liquidity, thus being supportive of two factors that could have an economic impact: firstly, this should increase demand for Treasuries & US MBS, therefore widening asset swaps and reducing treasury funding costs. With that in mind, we remain overweight US agency MBS. Secondly, this allows banks to take back business in the leverage space and reduces the extraordinary growth in the shadow banking industry, namely hedge funds who have stepped into the hole regulation has created, partly wanted and partly un-wanted.

The hedge fund industry has grown to around USD4 trillion. It owns USD2.4 trillion of treasuries alone, plus approximately GBP100 billion of gilts. Putting these two numbers side-by-side is somewhat misleading, as hedge fund industry is roughly 20x levered, however it shows that on a levered basis, it is now as large as the whole “real money” investment industry. Arguably, before post-GFC rigorous regulation, profits were shared more widely with not only bank shareholders but also tax authorities.

We observe similar developments in the UK, which should support the basis-futures trade and swap spreads.

The global economy is expected to press ahead with solid growth on both sides of the Atlantic

In the US, this will be driven by tax cuts and depreciation allowances deregulation as well as ongoing investments in AI infrastructure. In Germany, it will be driven by more fiscal stimulus but also surprisingly strong underlying growth in the EU periphery, with Greece, Italy, Spain, and Portugal growing on average close to 2% above potential growth rate and despite fiscal tightening. This should mean further credit upgrades for the countries, which also should lead to corporate upgrades linked to governments, primarily in the banking sector.

Where fundamental trends are currently diverging is on inflation. We expect European inflation to drop to 1.5%, which should take all inflation in the area lower. It will be an opportunity for central banks this side of the Atlantic to cut rates further to support growth. This clearly favours European fixed income for next year.

In the US it remains to be seen how much tariffs will push goods inflation even higher over the next couple of months. However, with little immigration left, the labour market should appear rather tight, and, despite little hiring, the risk of inflation will be kept alive. For now, we expect US inflation to rise and remain above 3% again for now. The Supreme Court decision and restructuring tariff income will be key to evaluating opportunities in inflation trading globally.

The UK, economically in-between and with the tightest fiscal rules, might have the worst behind it if it weren’t for politics. If “Love actually” is a guide and Christmas brings out the best in Britain, the rates market looks interesting. However, the reality is that potential disruptions in the government around Starmer and Reeves still leave us cautious on the pound, which is vulnerable to shocks.

Globally, while we expect growth to be solid and rates in general to have bottomed, several rate curves appear now to be too steep, and we should see flattening trends

The flattening trend is too early for Europe, with the ECB having room to cut rates next year and pension flows still unfolding. However especially in the Pacific region, where valuations seem stretched and above 5% forwards a buy, we would expect hikes being more than fine-tuning the optimal growth path.

While for Japan, we would expect more than fine tuning on rates, and we still think the BoJ will get closer to 2% in the next two years, with inflation overshooting and normalising around 2% indeed.