The second quarter of 2026 gave fixed income investors something they have not had in years: a legitimate reason to feel good about bonds. Yields remain elevated, income is flowing, and the asset class is once again earning its keep in a diversified portfolio. The challenge, as Schroders' US Multi-Sector Fixed Income Team makes plain in its mid-year assessment, is that not all of that optimism applies equally across sectors. The team draws on the discipline of the soccer pitch to frame the moment: success in today's market, much like in a major tournament, demands "offensive creativity" alongside "defensive resilience." The teams that advance are those that resist the urge to overcommit.
The Income Case Is Real
The foundation of Schroders' constructive stance on fixed income rests on a historically reliable signal. The team states that "history has consistently demonstrated that higher starting yields are one of the strongest predictors of long-term fixed income returns," and today's environment delivers exactly that. Treasury yields compare favorably with cash and equity earnings yields, and income, not capital appreciation, is expected to remain the dominant driver of performance. The team does not forecast a sharp rally in government bonds. Sticky inflation, resilient labor markets, and persistent fiscal deficits have reduced the likelihood of a rapid easing cycle. But with elevated yields providing a meaningful cushion against volatility, the team's view is that bonds are fairly priced and positioned to earn their way.
Credit: Carry Without a Catalyst
Corporate credit is where Schroders' discipline becomes most visible. Fundamentals are described as healthy, balance sheets are strong, and default risk is low. Yet the team's conclusion is restrained: "at current spread levels, we believe returns are increasingly likely to come from carry rather than further spread tightening." With investment-grade issuance running roughly 30% ahead of last year's pace and projected at an "eyewatering $1.2 trillion," the technical tailwind that supported spreads over the past 18 months is fading. The team continues to find select value among hyperscalers, banks and financials, and certain energy and auto issuers, but the posture is defensive. In a market priced for favorable outcomes, restraint is a form of risk management.
On AI-related issuance, the team takes a notably measured stance. Despite hyperscaler debt issuance running more than $182 billion year-to-date versus just $13 billion in the same period last year, Schroders does not see a credit bubble. The largest issuers carry strong balance sheets, low leverage, and committed customer backlogs. The view is that "the current investment cycle is being driven by strong underlying fundamentals rather than speculative excess."
Where the Value Is
The team is explicit about where it sees better risk-adjusted opportunity: agency MBS, structured municipal bonds, and emerging market debt. Agency MBS, despite spreads having normalized from their March lows, continue to offer high-quality credit exposure alongside attractive carry, and they screen well versus investment-grade corporates. Long tax-exempt municipals, which the team had flagged as historically undervalued at the start of the year, have since recovered toward fair value, and Schroders now favors taxable structured municipals, specifically PAC bonds, which it describes as combining "high credit quality, predictable cash flows and limited refinancing risk." In emerging markets, the team points to healthier external balances, elevated real policy rates, improved central bank credibility, and the observation that the asset class "remains under-owned even after the recent recovery in inflows."
The Fed Under Warsh
Schroders takes note of the Fed's evolving posture under Chair Kevin Warsh. The team characterizes the shift as one from detailed forward guidance toward data dependence. The Fed has also acknowledged, in its own commentary, that AI could prove inflationary in the near term before becoming disinflationary through productivity gains. Schroders reads this as pointing toward a patient, hold-oriented Fed, even as futures markets are pricing rate hikes.
Five Key Takeaways for Advisors and Investors
- Higher yields are a feature, not a problem. Today's elevated starting yields provide both compelling income and a meaningful buffer against volatility, improving fixed income's role in a diversified portfolio.
- Corporate credit spreads do not adequately reward risk. With broad credit spreads historically tight and issuance surging, the risk-reward in corporate credit is skewed toward carry rather than further compression.
- Agency MBS and structured municipals offer better relative value. These sectors combine quality, income, and more attractive valuations than similarly rated corporate alternatives.
- AI-related debt is not a bubble, but selectivity still applies. Strong fundamentals support hyperscaler credit, but the team favors entry points created by new supply rather than chasing the category broadly.
- Active management matters more as opportunities diverge. With spreads differentiated across sectors and the rate direction unclear, identifying relative value, not riding market beta, is where returns will be found.
The Schroders team ends where it begins: with discipline. "Valuation remains the anchor of the investment process and a key advantage for active managers." In a market where much is priced for perfection, that anchor matters more than ever.
Footnote:
Schroders US Multi-Sector Fixed Income Team. "Fixed Income Markets Now Demand a Mix of Tactical Offense and Resilient Defense." Schroders Insights, Schroder Investment Management North America Inc., 15 July 2026, www.schroders.com/en-us/us/intermediary/insights/fixed-income-markets-now-demand-a-mix-of-tactical-offense-and-resilient-defense/.
