PUBLIC & PRIVATE FIXED INCOME OUTLOOK

PGIM explores the fixed income market outlook for Q1 2026, in what stands to be year four of the “yield is destiny” bond bull market.

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PGIM explores the fixed income market outlook for Q1 2026, in what stands to be year four of the “yield is destiny” bond bull market, where high and range bound yields result in solid returns, and confusion creates ample opportunities for adding value through active management.

SUMMARY OF SECTOR VIEWS:

Sector Short-term Outlook
DM Rates Monitoring for higher volatility and repricing of term premia across developed market government yield curves, particularly as global central bank policies diverge. Steeper curves should enhance roll and carry opportunities.
Agency MBS Carry conditions. MBS carry remains intact vs. intermediate Treasuries despite tight spreads. We favour a barbell position consisting of near-par coupon and low coupon 30-year issues, while avoiding the middle of the stack. We are underweight higher coupons amid call risk concerns, and we continue to prefer specified pools over TBAs for better fundamental value and convexity.
Securitized Credit Carry conditions. Spreads generally widened in 2025, yet remain tighter than average. Given the sector’s flat credit curves, valuations on high-quality securitised assets remain attractive relative to other fixed income sectors. Our outlooks for CMBS, RMBS, CLOs, and ABS reflect tighter-than-average spreads and stabilising or weakening underlying asset fundamentals, supporting carry conditions with limited potential for capital appreciation. We continue to focus on tranches at or near the top of capital structures and remain highly selective of more credit-sensitive positions as downside risks outweigh the rewards. Positive ABF flows continue, and we are targeting structures suited to perform through the cycle in residential, commercial, and prime consumer subsectors.
Global IG Corporates Carry conditions. While spreads may widen in the short term, economic resilience, supportive yields, sound technicals, and stable credit fundamentals should help keep spreads near historical tights. However, the current environment is considered ripe for M&A—especially as companies seek AI-related cost efficiencies. We generally anticipate that heavier issuance will lead to some softening in technicals and credit fundamentals.
Global Leveraged Finance Carry conditions. We expect spreads to maintain a range near historical tights as strong technicals and a robust credit environment offset prevailing global macro risks. While still constructive overall, we maintain our close-to-home defensive positioning across all regions. Late-cycle conditions in direct lending warrant greater selectivity on new deals, heightened attention to lender protections, and an emphasis on add-on opportunities with existing portfolio companies.
EM Debt Modest spread tightening and attractive carry conditions. EM economic growth and improving fundamentals continue to attract flows into the sector despite tight spread levels. With the appropriate identification of bottom-up alpha opportunities, EM hard currency returns could still reach the high-single digit range. The return trajectory for EM corporates should also remain positive. Due to stretched valuations, we are cautious on EM rates, and, in EMFX, we expect the U.S. dollar to maintain its weakening bias.
Municipal Bonds Carry conditions. All-in yields, healthy fundamentals, and relative value opportunities will likely support demand going forward. The combined effect of anticipated Fed rate cuts and steep muni curves should help to mitigate potential volatility and encourage investors to extend duration.

References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.

 

The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.

 

Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.


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