Fixed income outlook: They want it all

To paraphrase a song by Queen, the market seemingly wants (and sees) it all in 2026, to justify current valuations in equity and credit markets: further Fed rate cuts, a sustained AI boom, robust German fiscal spending, a China recovery, and continued EM outperformance.

And who can blame them given the festive season of gift-giving ahead. However, November reminded us how fast risk sentiment can change. Bitcoin sold off, the Nasdaq fell 8% and even Nvidia shares came under pressure, fueling the discussion about bubbles.

Asset prices look mostly driven by Fed expectations. When markets priced out a December cut after the FOMC meeting, equities dropped. Later, comments from NY Fed President Williams, hinting a cut was still possible, triggered a sharp rebound, with the Nasdaq 100 rallying about 6% into month-end. In the meantime, credit spreads have stayed in a narrow range, even with cracks emerging in the private credit market.

For now, risk perceptions seem to have calmed, and investors remain focused on carry rather than directional spread moves. We would caution, though: if downside risks re-emerge, spreads could widen sharply, wiping out carry income. These developments underscore the thesis in our previous outlook Fearless — that the margin for error remains narrow.