Global Perspectives: Actively managing opportunities and risks in multi-sector fixed income

Lara Castleton: Hello, and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications that they have for investors. I’m your host for the day, Laura Castleton.

Today, we’re diving into our outlook for fixed income in 2026. What sectors look favorable? How does AI influence the opportunity set? And where might government policy impact fixed-income investors? To dive into all this, I’m thrilled to be back with John Lloyd, Global Head of Multisector Credit, and to introduce Brent Olson, Portfolio Manager at Janus Henderson. Gentlemen, thank you both for being here.

Brent Olson: Thank you.

John Lloyd: Thanks for having me.

Castleton: Let’s go to you first, John. Can you give us the state of the fixed income markets as we start this year?

John Lloyd: Yeah, so we came into the year incredibly bullish. It’s really a Goldilocks scenario for fixed income for a lot of different reasons. You know, if you look at the macro economy, we’re going to be above trend growth this year. If you look at GDP now for fourth quarter, it’s on track to print something in the 5% range. So, we’re seeing very strong fundamentals in the U.S.

If you look at EPS estimates on the equity side, they’re in the teens. You have an accommodative Fed, which has been a tailwind as well. So, you know, there’s some arguments about how many price cuts are in to rates for this year, but our view is there’ll at least be one, maybe two. So, you have that tailwind. And then another big factor influencing fixed income markets is QE [quantitative easing] is happening again. So, the Fed announced another program to buy $40 billion of front-end Treasuries a month. And we recently got an announcement from the GSEs [government-sponsored entities] that they’ll be buying over $200 billion of agency mortgages as well. So that’s going to put liquidity into the fixed income markets. And we’re at a historical point where yields are pretty attractive.

Now, the one thing we’re cognizant of is valuations are tight across almost all the markets. So we’re very cognizant of where we get that yield from and how tight spreads are. But I really think this is a year where you’re going to earn your carry, and maybe even a little, depending on the individual sector within fixed income.

Castleton: So, lots of opportunity in 2026, but we have been hearing the tight spread argument for a long time, especially in the high yield space. And Brent, I’m happy that you’re here today. So, you’re the lead portfolio manager on both our high yield here in the U.S. and global high yield strategies for the firm. So, I’m curious to get your take on the outlook for high yield this year. Spreads, obviously, as we just heard, are still pretty tight.

Olson: Yeah, it’s a great point. We did start the year with almost historically tight spreads, kind of in that 260 area. I will say that, the last few years, we’ve seen high yield perform very well. Yields have generally been pretty high. Most of ‘23, we saw over 8% yields in high yield. Kind of ‘24, it was 7%, over 7%. Now we’re a little bit below that, but for the most part, attractive yields. People are leaning into yields right now, especially high yield.

Castleton: And even though spreads have been tight, the market, as we just mentioned, has been pretty … it’s been holding up, I guess, on the surface. And if we continue to see a strong economy for 2026, perhaps those spreads can still maintain where they are.

Olson: Yeah, absolutely. And we’re off to a good start with the Russell 2000, which correlates highly to the high-yield market as well. Defaults are very low; they’re historically low. That’s probably not going to change much throughout 2026. We’ve seen some great estimates in the equity markets, with earnings going higher on estimates. So, you know, that’s a strong picture on corporate earnings. And that should translate for high yield.

Castleton: Okay, and that’s the one concern you mentioned, defaults, because that’s what I do hear, with spreads where they are today. A lot of investors kind of go back five years and look at the high yield index back five, 10 years ago, and default rates are lower today. Maybe the index is a little bit different than it was in the past.

Olson: It’s the highest quality it’s ever been. So, I think we’re close to 60% in BB [rated], which is considered the high-quality piece of high yield. So yeah, it’s very high quality right now, very low duration as well. So, we’re under three years on duration in high yield. It’s not a very long asset class, so most of our issuance is in the five- to seven-year range. Yeah, so that’s an encouraging data point for high yield, how short it is, how high quality it is right now.

Castleton: So, as we look across the major super-sectors, John, so that’s high yield corporate credit, do we share similar sentiments then in the investment grade realm?

Lloyd: Yeah, I think we’re most negative on investment-grade corporates within the fixed income market. And there’s a couple reasons driving that. Unlike high yield, where you can argue spreads are tight, in around a 260 area, but you have three years’ duration, so your breakeven is still pretty decent before you’re going to take any type of loss there, right? So you can earn that carry, most of that carry, even if spreads widen a little bit.

If you look at IG, IG is near the tights. I mean, we’re like 5 basis points off the tights in investment-grade corporate. It’s a much longer index as well, o your break evens are very, very narrow. So, if we get 10 basis points of widening in IG, it could wipe out your entire carry for a year. So that’s one reason I’m a little bit more negative on IG.

The other reason is, you know, we’ve been in a really good technical environment in fixed income. I think that’s generally changing I think there’s going to be two big drivers of that: AI, which I think we’ll be talking a lot about today, is a big driver. There’s going to be a lot of debt issuance across all sectors of fixed income. I think in IG, you’re going to see … that’s going to be where the preponderance of that debt is going to be issued. You know, we have the hyperscalers there, between Meta, Google, Amazon, Oracle, that are going to issue, you know, quite a bit of debt. We could see the tech component of IG go from roughly 9% of the index over the next, call it five, six years, to 15, 20% of the index.

And then the other thing driving technicals is, I do think this is going to be a big year for M&A. It was supposed to happen last year. We had Liberation Day that threw a wrench and, you know, I think the word de jour last year was uncertainty. I think a lot of that uncertainty has gone away. And with this robust macro backdrop that we have, I think M&A is really going to pick up. And I think high yield and loan markets can absorb that with the private markets. I think when it comes in IG, that sets up a little bit more of a negative technical in IG. So, with spreads as tight as they are, even though fundamentals are strong, just don’t love the break evens there.

Castleton: That’s the benefit of managing a multi-sector strategy, is that you can look across all geographies, sectors, and really look for the best relative value in terms of spreading yield, which gets me back to then some of the fundamental opportunities that we’re finding in high yield. If we do favor the high yield space overall over the corporate credit space, where are some of those fundamental opportunities today?

Olson: Yeah, we did see some issuance in the AI space and high yield. It came last year, kind of at the tail end of the year, addressing the power compute shortage that we have. The high yield market wasn’t terribly familiar with it initially, but now everyone’s coming up to speed on some of these. And yeah, we’re positive on these; we’re going to see more this year. I think, in fact, we’re kind of leading in that thought sort of leadership in AI in the high yield market.

Castleton: Maybe double click on that a little bit more because AI, a lot of listeners, I think, first think the big hyperscalers, those are the ones issuing debt into this market. Is that kind of what we’re talking about here? Or there’s a lot of other companies coming?

Olson: Yeah, they’re smaller. They’re single-asset data centers that offer a certain amount of power to some of the hyperscalers and neoclouds. But they’re very important, right? And they’re coming at 250 to 500 megawatts at a time. And in some cases, what was almost revolutionary for high yield was to see the Google backstop on some of the leases that came in. So, these were secured deals that came in the double B category and get offered almost 8% yields to start.

Castleton: Great. Good to hear. Any other fundamental opportunities in high yield outside of the way?

Olson: Yeah, sector by sector, because that’s the way this is going to develop in ‘26. It’s not going to be high yield beta outperforming; it’s going to be very sector specific and alpha driven, which is right up our sweet spot on security selection. But I think you might see some opportunities in home builders in the homebuilding space, right? We’re going to have some comprehensive, we think, developments there with Trump and how to help that space increase inventory out there, reduce homebuilding prices. So yeah, homebuilding offers some opportunities. We’ve seen some M&A in the building supply space. So that will probably continue this year. And selectively in the metals markets, we’re positive on copper and some of the metal themes that are out there. We could see some consolidation in metals and maybe some interesting opportunities there.

Castleton: Great. Not time for beta, time for alpha, and fundamental research. That’s great.

Olson: That’s a big theme, right?

Castleton: Yeah. And John, back to you. We’ve talked about the securitized market, especially in this multi-sector strategy that we manage here at Janus Henderson for a long time. Can you talk through some of the fundamental opportunities you’re seeing outside of the high yield market and maybe some of those sectors?

Lloyd: Yeah, we’re still positive on the securitized markets. And if you’ve listened to me before, you’re getting more spread per unit of volatility there and in tight spread environments. That’s a major focus for our investments. So, it’s interesting, Brent brought up the homebuilding space and some of the policies that the administration is focused on in affordability for new home buyers to buy homes. And so, I think a very interesting area there that we continue to like, and I think you’re seeing spread tightening now from the agency buying program that the government put in through the GSEs, is in mortgage resi [residential] credit. So, if we see agency spreads tight, that should be good for the mortgage resi credit market. You can pick up kind of single-A type risk in that market at 160 to 170 type spreads today. We find that pretty attractive.

Going back to AI too, it’s another area where we can play AI. We saw a recent deal that just priced, it was a triple B rated data center deal to the hyperscalers and the triple B tranche priced in the 300s. So, you’re seeing pretty attractive relative values. So, steering away from those IG hyperscaler bonds and into the securitized side, the one thing we are cognizant of on the securitized side, there’s gonna be a lot of supply issuance for AI as well. So, we could see that, you know, we could see that new issuance up almost 50% year over year. But those spreads you’re getting compensated now for, and it’s an area we like, and you know, we’re very bullish on AI.

Castleton: So not only, I think this is really important to remember, we’ve been bullish securitized for a very long time, but as you mentioned, there’s now a couple of tailwinds coming into the market as well, which is AI, and then namely also some of this fiscal policy that makes 2026 shape up to be pretty opportunistic for some of those sectors and the fundamental work you do there.

What about global? And I’ll put that to just both of you, because we do … at Janus Henderson, we’re a global asset manager, so we look not just in the U.S., but outside. What opportunities, Brent, if I may start with you, do you find within the high yield market outside the U.S.?

Olson: Yeah, and Euro high yield offers its own unique characteristics. It’s a higher-quality high-yield index that tends to correlate well with emerging markets. Strength in emerging markets can mean a little more strength in the euro market versus U.S. And so we monitor those things all the time, and our global high yield fund kind of make our regional allocations based on that. But yeah, Euro definitely has its moments where it’s a good diversifier from U.S.

Castleton: And there’s quite a bit of shift in Europe in terms of catalysts, of more fiscal spending. Is the market just as strong there? Are you seeing different dynamics between the U.S. and the Euro market in high yield?

Olson: Yeah, the sector weights are a little bit different. So, there’s not quite as much of a tech sector, for instance, there. Maybe the innovation in tech is a little bit less, but there’s other sectors that make up for that. For instance, there’s more of a KEMS factor there, and that sector could be something that offers some opportunity if certain developments occur in that region. So, you have to shift the focus a little bit. There won’t be so much AI perhaps in Euro high yield, but maybe more of the traditional industries and such.

Castleton: We saw the market broadening in 2025. Obviously, tech still has been a winner, but it has spread to other areas and other sectors. So that diversification Europe can provide maybe a good opportunity for investors. Maybe to you, John, there’s plenty of securitization in the Europe market and globally as well. Where are you seeing opportunities outside the U.S.?

Lloyd: Yeah, outside the U.S., I think there’s a couple areas we like. Securitized still offers value there. It’s predominantly in the ABS market and CLO market in Europe. It’s interesting, the CLO market in Europe is trading, you know, roughly, call it 10 basis points behind the U.S. market. So you can go into similar type, rated tranches, similar risk, and pick up another 10 basis points. So we like that.

It’s a similar story in loans as well. And loans as an asset class, [is] a little bit more favorable. It tends to have a higher Sharpe ratio, less downside, than most of the other asset classes within credit, levered credit. And today you’re picking up some yield in those credits. And particularly in Europe, you’re seeing companies issue dual tranches. So, a company will come to market, they’ll issue a tranche in USD and a tranche in euros. And that euro tranche is pricing anywhere from, you know, call it 25 to 50 back of where the U.S. dollar tranche is pricing. So, it’s the same risk, same default risk that you’re taking and you’re getting more yield for it. So that’s a trade we like where we have, you know, a global opportunity set as well.

The other thing I’ll comment to, and this is just more generally, but it’s true for global markets as well, it is really important right now to look at dispersion. We’re seeing a lot of idiosyncratic risk, one-off risk. And if you think about where yields are today and how tight spreads are, I think in order to earn that carry, it’s as much about what sectors you’re in as well as what credits you’re picking, and you need to avoid those. And you’re seeing that not only in the loan market, you’re seeing it in the high yield market, both in Europe and the U.S. So it’s really about active management in the credit markets today.

Castleton: And so, you know, we’ve talked high yield, IG, loans, ABS, CMBS, MBS, all of these sectors globally and in the U.S. that you guys are managing. What are you going to be looking to in 2026 that could potentially affect the asset allocation decisions? Either one of you go ahead and start.

Lloyd: Yeah, I can start, Brian. I think right now, given spreads are relatively tight and you’re not seeing a lot of opportunity across asset classes, when I think about asset allocation within fixed income, it’s really about driving that spread per unit of volatility. And so that’s why, investment grade, and breakevens in investment grade, a little more negative; most negative that I’ve probably been on that asset class in a while. And some of the securitized, and even high yield, look attractive now [in terms] of where we can get that yield. I think the interesting opportunity, and we saw it last year, is I think as we go through the year, there’ll be events that have idiosyncratic results on individual asset classes, and we can take that opportunity then to swap into those asset classes. Last year, we did it with high yield during Liberation Day. We took our high yield way up because high yield sold off almost two and a half times any of the other fixed income markets. So, I think that’ll happen this year. What are the events or catalysts? It’s always hard to tell, but that’s where having a dynamic asset allocation process is really important in fixed income.

Olson: Yeah, just to echo that, in ‘25, you had one great chance to lean in, and that was sort of in that early April timeframe when spreads hit 450 for a short period, maybe a week or so. And that is what we did, and that will be the playbook again going forward in ‘26 for high yield. Spreads are a bit tight right now, but if they give us that chance with some volatility, we will definitely be engaging that.

Castleton: I think that’s hugely important to emphasize: over a one-week period. These are changes that we are monitoring every day and can make shifts on the fly, much quicker than maybe even I am able to understand what’s happening in the market.

So, thank you so much for the update for 2026. There will be be a lot that we’ll be watching, but clearly a good opportunity set across many sectors using the fundamental expertise that we have here at Janus Henderson.

Thank you for listening. We hope you enjoyed the conversation. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts or check out our website at janushenderson.com. I’m Laura Castleton. Thank you. See you next time.