Aberdeen Investments: short-term fixed income outlook
13 JAN, 2026
By Mark Munro
By Mark Munro, Director of Fixed Income Investments at Aberdeen Investments
We enter 2026 with credit spreads at their tightest levels since before the global financial crisis. Many popular risk areas – such as high-yield bonds, subordinated financial bonds, and emerging market debt – have delivered very strong performance over the past 24 months.
However, flows into fixed income markets continue, and the large volume of bond issuance already seen at the start of 2026 is being met with exceptionally strong demand. In fact, according to J.P. Morgan, we have seen the second-largest day of corporate issuance in history in the United States, and the largest issuance day ever in Europe. The reason is that investors remain attracted by overall yields, which continue to sit comfortably above the average levels of the past 20 years.
Adding to this, it is unlikely that the ECB will raise rates this year, and there could be two further rate cuts in the United States, driven by a new, very dovish Fed chair, further reinforcing investor confidence.
From a macroeconomic perspective, Europe remains largely stagnant, while the United States continues to move forward, supported by new investments in artificial intelligence. It is worth remembering that historically low growth levels of around 1–2% are ideal conditions for investment-grade credit spreads – “not too hot, not too cold.”
Fundamentals must be analyzed sector by sector, but overall they remain solid. Banks are performing particularly well, and confidence is improving in sectors such as real estate. The automotive sector faces multiple challenges, with a general weakening in credit trends, while chemicals and basic materials have yet to emerge from recession. Greater attention will be paid to the technology sector, particularly to the delivery and financing of artificial intelligence.
So where does this leave us? Credit spreads are tight and may remain so for longer. We believe they will stay largely range-bound, with a modest widening over the next six months. While further tightening is possible, it should not be the base expectation.
Duration is far harder to predict than last year. Markets have already largely priced in further U.S. rate cuts. Our base case points to a slight steepening of yield curves. This raises a key question: while everyone wants access to attractive yields, how much risk are we willing to take to achieve them? And how much duration are we truly prepared to assume?
Short-term credit investments can continue to offer attractive yield levels compared with cash and government bonds. Given the current environment and valuations, this approach makes the most sense from a risk-adjusted perspective. In the Short Dated Enhanced Income Fund, we have reduced high-yield exposure from 17% to below 12%, while increasing cash and short-term government bonds from 10% to nearly 15% in recent months. This provides risk reduction, while preserving the flexibility to add risk if market sentiment shifts.
Within this slightly lower-risk positioning, we continue to favor banks, utilities, and telecommunications, and we expect senior bank debt to trade above non-financial debt again in the coming months. Short-dated subordinated bonds, with maturities around two years, remain attractive to us. We continue to search for the best ideas in emerging markets and Asia, as well as select BBB and low-BB rated opportunities to enhance yield.
Returning to technology issuance, which became a major theme in the fourth quarter of last year, UBS now estimates that USD 900 billion will be issued across the sector this year, with 60% coming from public markets. These are undoubtedly large figures, but they can be absorbed, albeit with short periods of market indigestion. We have seen this in recent months, allowing us to access new issues from high-quality issuers such as Amazon and Google, at spreads up to 25 basis points wider than levels at the end of the second half of last year. The approach has been to capture the post-issuance outperformance and wait for the next entry point.
