Global Fixed Income Strategy - February 2026
Global macro strategy
2026 macro outlook – US, Europe and UK
Executive summary
US
Macro backdrop and policy outlook: After the policy shocks and data disruptions of 2025, we expect the US economy to regain momentum in 2026, with stabilizing labor markets and modest tailwinds from easier financial conditions and fiscal support. Inflation remains sticky around 3%, leaving the Fed close to neutral. We assume two “compromise” rate cuts, driven more by political and institutional dynamics than economic necessity.
Recent data and baseline view: Incoming data since the reopening of the government broadly support our baseline view: Labor market conditions have stabilized, with forward-looking indicators pointing to improving hiring, while inflation has surprised slightly to the downside but remains uncomfortably above target. Growth appears to be picking up without forcing near-term easing.
Revised growth and productivity view: With modestly stronger productivity growth—partly reflecting early AI effects, labor reallocation, and business formation—and continued support from immigration and rising labor force participation in early 2026, the economy could grow around 2.8% without overheating. We view AI as a longer-term productivity catalyst, with gradual gains emerging over time rather than providing an immediate, economy-wide boost.
Europe
Macro backdrop and policy outlook: The ECB has shifted its 2026 growth outlook toward stronger momentum, supported by German fiscal stimulus and higher defense spending, and views policy as neutral. However, we see downside risk to its inflation forecast, as alternative wage indicators suggest faster wage moderation than implied by the ECB’s preferred measure. This raises the chance that inflation falls more quickly, and marginally increases the likelihood of a rate cut in early 2026, even though our base case remains rates on hold.
UK
Macro backdrop and policy outlook: UK data point to a more dovish outlook than the Bank of England’s November projections, with soft labor conditions and inflation set to fall faster than expected, supporting our base case of two rate cuts in 2026, with upside risk to a third cut if unemployment rises more sharply.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Non-investment grade bonds, also called high yield bonds or junk bonds, pay higher yields but also carry more risk and a lower credit rating than an investment grade bond.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
