Resilient Income
Fixed Income Forward: May 2026
As the Iran conflict continues to dominate headlines, we make the case for unconventional diversifiers, such as selective emerging market assets, renminbi and high-quality spread products.
Key takeaways
- While most central banks held rates steady, the Iran conflict is creating divergent policy trade-offs for the next move.
- Sharp repricing in core rates markets may present attractive, tactical, relative value entry points.
- Maintaining allocations to unconventional diversifiers, such as selective emerging market assets, renminbi and high-quality spread products, could help to cushion portfolios against equity and rate volatility.
Geopolitical shock and diverging paths
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria.” – Sir John Templeton
What happened in April
Our take on investment implications
As the Strait of Hormuz remains closed, the probability of a shift in the fundamental macro trajectory is rising – from accelerating growth and stable inflation towards slower growth alongside higher prices. Even if an agreement to reopen the Strait were reached as early as this month, clearing shipment backlogs and normalising trade flows would likely take several months.
While equity markets appear largely unfazed, core rates have moved decisively, repricing the implications of higher energy prices for the monetary policy path. Credit and emerging markets continue to be driven largely by equity beta. These divergent market responses underscore an important development beneath the surface: shocks are being absorbed very differently across asset classes, regions, yield curves, sectors and individual securities.
In the US, growth and inflation dynamics remain manageable, giving the Federal Reserve some breathing room. But the longer energy prices stay high, the more vulnerable this backdrop becomes. We favour long US Treasury Inflation-Protected Securities (TIPS) as protection against upside inflation risks and continue to position for US yield curve steepening. Weak fiscal dynamics, higher inflation volatility and diminishing fiscal and monetary policy credibility point to rising term premia at the long end of the curve.
In continental Europe, upside inflation risks and downside growth risks have intensified – we see the European Central Bank’s next move as likely to be a hike. In the UK, inflation risks remain elevated, but a softening labour market complicates the policy path. While we see relative value in UK Gilts following the sell off, we remain mindful of a challenging macro backdrop, with rising inflation and fiscal pressures compounded by elevated political risk. The Bank of Japan continues gradual normalisation, favouring a flatter yield curve. In emerging markets, rising energy prices act as a tailwind for exporters such as Brazil and a headwind for importers like the Philippines.
With credit spreads at historically tight levels, global credit markets are likely to be driven by equity volatility. Any reassessment of the timing or magnitude of AI-related investment returns could put pressure on multiples and amplify a risk-off move. We maintain a moderate credit allocation, focused on quality carry through floating-rate and securitised exposures, with a preference for financials and consumer non-cyclicals over cyclicals.
As dispersion widens, security selection and relative value increasingly outweigh beta as the primary drivers of return. A globally oriented, actively managed approach is critical – not only to capture emerging relative-value opportunities, but also to enhance resilience through less conventional diversifiers. We favour selectively taking duration risk in parts of emerging markets where real rates continue to decline; adding renminbi or Chinese government bonds and commodity-producer currency exposure to otherwise G10-centric portfolios; and maintaining a measured tilt toward credit.
CHART OF THE MONTH:
Source: Allianz Global Investors, Bloomberg, as at 30 April 2026. The information is provided for illustrative purposes only, it should not be considered a recommendation to purchase or sell any particular security or strategy or as investment advice. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
In today’s environment, securitised credit offers a particularly attractive combination of floating-rate features, secured capital structures, diversified collateral pools and multiple layers of credit enhancement. The asset class gives investors exposure to a set of cashflows generated by a pool of assets remote from corporate credit risk. These cashflows are “tranched”. The highest rated tranche has the first call on the cashflows and the security, but the lowest yield. The lowest rated tranche has the highest yield but could be wiped out if cashflows from the assets are lower than expected. We invest across a broad range of global securitised products, with a focus on Commercial and Residential Mortgage-Backed Securities (CMBS, RMBS) and Collateralised Loan Obligations (CLOs). Our preference is for the higher rated tranches which offer the best relative liquidity and security enhancements within the securitised universe to generate resilient income. We often see compelling relative value versus corporate credit. For example, an AAA securitised bond has a similar yield to an A-rated corporate bond. The yield pick-up comes from additional complexity and lower liquidity than corporate bonds – we tend to cap securitised allocations to protect overall portfolio liquidity.
FIXED INCOME FORWARD | WHAT TO WATCH
- US-China summit: The fact that the Iran war has not gone as planned means that when US President Donald Trump and Chinese President Xi Jinping finally sit down, both presidents will likely have an enhanced desire for a productive meeting that could show both the world, and their respective populations, that “deals” between the world’s two economic superpowers are still possible.
- AI debt financing: AI hyperscalers continue to tap bond markets with multi-billion, multitranche infrastructure financing, using investment-grade borrowing rates to lock in long-duration capital for data centre construction, electrification infrastructure and computing capacity. Watch for signs of investor unease with the volume of AI debt underwritten, especially from more challenged issuers with less diversified and resilient growth in free cashflow.
- Inflation data: Bond markets are less sanguine about the interest rate outlook, flashing some caution through volatile longer-dated yields and rising “breakevens” (the spread between nominal and inflationadjusted government bond yields). Pay close attention to inflation readings that could challenge current complacency around well-anchored inflation expectations and structural reasons why core inflation might not rise alongside headline inflation.
FIXED INCOME MARKET PERFORMANCE
Source: Bloomberg, ICE BofA and JP Morgan indices; Allianz Global Investors, data as at 30 April 2026. Index returns in USD-hedged except for Euro indices (in EUR). Asian and emerging-market indices represent USD denominated bonds. Yield-to-worst adjusts down the yield-to-maturity for corporate bonds which can be “called away” (redeemed optionally at predetermined times before their maturity date). Effective duration also takes into account the effect of these “call options”. The information above is provided for illustrative purposes only, it should not be considered a recommendation to purchase or sell any particular security or strategy or as investment advice. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
