Key takeaways:
- Income likely to lead returns in 2026: Beta-driven markets look set to give way to a market driven more by income and alpha opportunities; a higher cost of capital drives more idiosyncratic issues, increasing the importance of security selection and understanding underlying credit fundamentals.
- Securitised credit offers efficient spread per unit of risk: Structural protections, asset‑backed cash flows, and floating‑rate coupons position securitised markets well for riding out bouts of volatility. A global lens can maximise the opportunity set, with attractive relative value opportunities in European CLOs, U.S. non‑agency mortgages, and selected Australian securitised credit.
- Evolving markets create opportunity: AI hyperscaler capex leads to higher supply but also new areas of investment. Income can provide a cushion in volatile markets, while episodes of dislocation may create opportunities to rotate into more convex sectors, particularly high yield and emerging markets.
IMPORTANT INFORMATION
Actively managed investment portfolios are subject to the risk that the investment strategies and research process employed may fail to produce the intended results. Accordingly, a portfolio may underperform its benchmark index or other investment products with similar investment objectives.
Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.
High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.
Mortgage-backed securities (MBS) may be more sensitive to interest rate changes. They are subject to extension risk, where borrowers extend the duration of their mortgages as interest rates rise, and prepayment risk, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.
Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Alpha: The difference between a portfolio’s return and its benchmark index after adjusting for the level of risk taken. This measure is used to help determine whether an actively-managed portfolio has added value relative to a benchmark index, taking into account the risk taken. A positive alpha indicates that a manager has added value. Beta: A measure of the relationship that a portfolio or security has with the overall market. The beta of a market is always 1. A portfolio with a beta of 1 means that if the market rises 10%, so should the portfolio. A portfolio with a beta of more than 1 means it will likely move more than the market average (i.e., more volatility). A beta of less than 1 means that a security is theoretically less volatile than the market. Collateralised Debt Obligation (CLO): A structured finance product that is backed by a pool of loans and other assets such as mortgages, unsecured credit card debt, or personal loans. Although similar to CLOs, CDOs tend to be considered riskier given their concentrated focus and the use of complex derivatives that can obscure the relevant risk factors. Convexity: The convexity of a bond captures how a bond’s duration changes when market interest rates move. Because bond prices and yields are inversely related, convexity explains how steep or flat that relationship becomes. A bond with higher convexity sees more curvature in its price-yield relationship. A bond with lower convexity responds more linearly to interest rate movements. Credit: Credit is typically defined as an agreement between a lender and a borrower. It is often narrowly used to describe corporate borrowings, which can take the form of corporate bonds, loans, or other fixed-interest asset classes. Cyclical sectors: Sectors that sell discretionary consumer items or services, such as cars, or industries that are highly sensitive to changes in the economy, such as mining. Diversification: A way of spreading risk by mixing different types of assets or asset classes in a portfolio on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification. High yield bonds: A bond with a lower credit rating than an investment-grade bond, also known as a sub-investment grade bond, or ‘junk’ bond. These bonds usually carry a higher risk of the issuer defaulting on their payments, so they are typically issued with a higher-interest rate (coupon ) to compensate for the additional risk. Hyperscalers: Large-scale data centres that provide a wide range of cloud computing and data solutions for businesses that need vast digital infrastructure. Idiosyncratic risk: Risk factors that are specific to a particular company and have little or no correlation with market risk. Securitised credit: Securitisation is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities together which constitutes a market for buying or selling. The interest and principal payments from the assets are passed through to the purchasers of the securities. U.S. non‑agency mortgages: Securities that are backed by loans that often have less favorable collateral, credit, or underwriting characteristics than those issued by government or government-sponsored entities. These may include “subprime” loans, made to borrowers with lower credit ratings or limited credit histories, who are more likely to default. Securities backed by such loans may be more sensitive to housing market conditions and may experience greater volatility and risk of nonpayment, particularly during periods of economic stress.Definitions
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Ali Dibadj: Hi, everybody. It’s Ali Dibadj. I’m here at the UK Investor Conference. Tons of clients, tons of energy. I’m also here with Tom Ross from our high-yield and multisector income and Ian Bettney from our securitised businesses. Guys, the cost of capital being higher has been a long-term theme for us for a very long time. How do you see it in 2026?
Tom Ross: So, if we think about this year, we’ve got modest global growth, but we’ve also got supportive policy as well, which you don’t tend to get together. So we believe it will be income and yield that will probably drive the majority of returns for clients as we look throughout this year.
But also, it’s unlikely to be a beta year. It’s probably likely to be more focussed upon alpha opportunities and that return of cost of capital is really important in then deciding between the winners and the losers, certainly within the corporate market.
Ian Bettney: This higher cost of capital, I think, is going to be driving more idiosyncratic issues like we’ve been starting to see a rise of over recent years. I think that’s going to drive bouts of market volatility, which securitised is well positioned to ride out.
The structural protections within securitised, the direct asset-backing of cash flows, as well as the floating-rate nature of many of the sectors, will also provide a good, defensive, income-generating opportunity to be able to position yourselves well to ride out uncertain and turbulent markets. Spreads have come a long way over the past couple of years in a lot of sectors, but there are still pretty compelling opportunities when you look across the global securitised spectrum.
Dibadj: So, among heightened geopolitical uncertainty, talk of bubbles, what should investors be thinking about these days?
Ross: Yes. There’s a lot going on, isn’t there? And I’ll probably add to that as well. We’ve also got more supply coming this year. Obviously, government markets are going to be continuing to be supplying there, but also we have all of the AI hyperscaler capex coming through, potentially US$500 billion this year, US$700 billion next year as well.1 So there are challenges out there.
For investors thinking about all of these risks, but also, being mindful of that supportive growth and supportive policy, we feel it’s about probably using areas like income as the best hedge for that scenario. So it’s all about maximising spread per unit of risk. So it’s investing in areas like CLOs and securitised in order to do that. And then, if we do get volatility, which we could quite do with those risks there, then switching into the more convex asset classes, high-yields, emerging markets.
Bettney: Within the securitised world, we’re seeing high levels of issuance as well. In particular, the past two years have seen levels not really seen in nearly 20 years. We’re also seeing a lot of interest increasing in this space as well, too, which is driving capital inflows into the space as well.
Now, there are new sectors evolving. Data centres are going to be a very big sector in Europe and Australia, it’s more established in the US, while commercial real estate is recovering from the volatility that has recently suffered and growing as a space. Now, these sectors will have more idiosyncratic risks with them and they’ll be more cyclical, but they will also pay commensurately. So there’s a lot of opportunities that are available.
Dibadj: So, from all we’ve talked about, it seems like it’s a very exciting time to be a fixed-income investor these days. Where are the real opportunities and perhaps the watch-outs as well?
Ross: So we’d say there are certain areas within cyclicality and more cyclical sectors that, yes, are under pressure with growth being not extremely high, but it has meant there’s some valuations there. If you’re doing the right credit work and being selective, there can be some really great opportunities there. I’ll also note within AI, say within the debt markets, there’s some real focus upon some of the real key bottlenecks, so areas like power generation, also memory, so some of those type of sectors.
Bettney: For securitised, I think, is going to be maximising that global diversification to be able to take advantage of pockets of value that are still available across the global securitised spectrum. Now, thinking about some of the issuance that we’ve seen over the recent years and certainly where we’re going to see supply coming through, it’s having that capacity and that global platform to be able to access those different pockets successfully.
CLOs, we mentioned, in Europe in particular are standing out, quite good value. US non-agency mortgages are generally standing out quite attractive at the moment as well. Australian securitised had a great run over the last year but still stands out as pretty compelling RV (relative value) compared to comparable quality UK and European securitised credit.
Fundamentals are the key, really. Particularly when you’re talking about securitised, you’re looking at financing specific pools of assets. So it’s really about having that local, detailed, on-the-ground understanding for each individual asset class to be able to navigate the broader market turbulence.
Dibadj: Tom, Ian, thank you so much for all those insights. Thanks for everything that you do for our clients and understanding fixed income and I’ll let you get back on stage. I really appreciate your time. Thanks for listening.
1 Goldman Sachs.com; Why AI Companies May Invest More than $500 billion in 2026; 18 December 2025.
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