Video: Seek diversified income
Quality bonds
We believe quality bonds—specifically high grade government and investment grade corporate bonds—have an important role as a source of yield and diversification in 2026. We expect medium-duration quality bonds (four to seven years) to deliver mid-single-digit returns from a mix of yield and capital appreciation as the Fed cuts rates. We expect quality bond returns to exceed cash rates, especially in adverse scenarios where bond prices rise as rate expectations fall. Investors in economies with low or zero interest rates may not derive much income from quality bonds but should remember their portfolio diversification benefits as a reason to hold them.
Diversified fixed income strategies
We are more cautious about riskier parts of fixed income like high yield given very tight spreads. Nonetheless, we see merit in diversified fixed income strategies for investors looking to earn higher returns from fixed income. By combining investment grade bonds, and select high yield and emerging market debt in a risk-controlled way, investors can enhance yield while managing credit and duration risks.
Select direct lending
Private credit has attracted significant inflows in recent years as investors seek higher returns. We believe the asset class offers strong long-term income potential. However, tight spreads—where lenders earn only modest compensation for the risks borne— as well as pockets of financial stress necessitate careful selection. We recommend limiting excessive exposure in the lower middle-market segment (smaller companies), where risks are rising. We like sponsor backed loans (to private equity-owned firms) and senior loans (with repayment priority) and believe investors should focus on larger companies and sectors that are less sensitive to economic swings and carry less debt.
Equity income
Income-seeking investors in markets where bond yields are low or credit spreads are tight may find better income generation opportunities in equity strategies, including both dividends and options strategies. Our preferred markets for dividend strategies are Switzerland, where high-quality dividend stocks yield about 4%, well above local bonds; and Southeast Asia, where average dividend yields also stand north of 4%. Equity income strategies that combine dividend strategies with systematic option-selling could generate even higher yields, enhance diversification of returns, and offer a more resilient income stream across cycles.
Yield-generating structured investments
We believe investors should also consider yield-generating structured investments, especially as interest rates drop. These structures—such as equity-linked notes—offer a yield in exchange for the obligation to buy an instrument at a predefined lower price. Lower rates make these structures relatively more attractive, although low volatility can mean option premiums and yields are reduced. We recommend careful attention to liquidity, issuer, and market risks within a diversified portfolio.
