LatAm elections: What investors should watch next
High real yields have made Latin America an investor darling in global fixed income. After a year of elections, does the region have the politics to keep it that way? Graham Stock of RBC BlueBay Asset Management explains the outlook.
Read article >
In partnership with
Latest Articles
Previous Articles
Friend or Foe – could this be the defining question for EM sovereigns in 2026?
With uncertainty elevated and US policy more transactional, 2026 could reward EM sovereigns that anticipate the next geopolitical winners and losers
Policy & Politics
Insights into the impact on investment decisions
Finding lower correlation in volatile markets
In a market environment with tighter spreads and geopolitical volatility rising, strategies that are diversified and offer attractive income are resonating with investors. Senior Portfolio Manager Tom Mowl explores what these assets look like
Is there a risk of a Fed cut overdrive in 2026?
With the US Federal Reserve recently cutting interest rates to 3.50%-3.75%, further cuts – if rapid enough – could bring new uncertainty, but also fresh opportunity, to the outlook for US fixed income
2026 opportunities in uncertain times: AI, innovation and EM yield pick-up
RBC BlueBay’s investment experts review an eventful 2025 and explore the outlook for 2026 across dynamic market environments and sub-asset classes
Extrapolating the wrong past: Why markets keep mispricing political risk
Markets have a tendency to extrapolate the recent past. But what if some of the assumptions investors have relied on for decades do no longer hold?
Latest previews
India in focus: Opportunities and trade-offs
Richard Farrell, portfolio manager on the RBC Emerging Markets Equity team, explains why India’s structural growth story is compelling – but not immune to valuation, reform and geopolitics
A crucial time for US fixed income supply and demand
Record AI capex requirements and the return of Fed bond-purchases are helping to shape dynamics that fixed income investors cannot ignore.
A confluence of factors are benefitting fixed income investors right now, according to Kaspar Hense, BlueBay Senior Portfolio Manager, Investment Grade at RBC BlueBay Asset Management. These, he explains, are combining to offer a favourable environment for active managers willing to sift through these securities.
Kaspar Hense
“Never has demand and supply been more important in the fixed income market, especially on the government side than in the past, with debt levels very high,” says Hense. “But also never has the fiscal and monetary policy been more joined than in the past. This is getting more intermingled at this point in time, in particular in the US.” On the monetary policy side, he points to the growing expectation that the US Federal Reserve (Fed) will return to the market soon and reignite a bond purchase programme. The fixed-income backdrop is key. 2025 has seen the US government offer more bills than bonds, relieving pressure on coupons in the latter, and instead taking advantage of cheaper debt at shorter maturities. With the Treasury needing to now stabilise that short-duration supply, Hense says he and his team expect the central bank to purchase between $250bn and $480bn in relatively longer-dated Treasuries in response to tensions he has seen in the repo market. Adding to current fixed income dynamics, Hense sees the US mega-cap tech “Magnificent Seven” (Mag7)’s significant presence in the US money market also influencing overall pricing.
In terms of what this all means for investors, Hense thinks they may be able to benefit from the current supply and demand dynamics in the fixed income universe, but there are still risks. Indeed, JPMorgan CEO Jamie Dimon recently made headlines when he warned about “cockroaches” lurking in credit markets, pointing to high profile bankruptcies as indicative of others lurking out of sight. Though Hense agrees credit markets are tight, he is more optimistic. “We think [the cockroach sentiment] is a bit overstretched at this point in time, but it's completely fair to highlight the risk and that in this higher yield environment you will see more of these happen,” says Hense. As a case in point, at this point in the cycle, Hense and his team are steering away from overly indebted sectors. This includes areas such as utilities and media with high capex needs that could have vulnerable capital structures should the market environment shift. The team are also wary of anything highly impacted by interest rate moves such as real estate, which could make them especially sensitive to rising default risk. “We are still positive on high yield but what we see [in that] market is very similar: that the spreads are tight,” adds Hense. “On an asset allocation basis, we are very conservative and looking for less indebted structures in the high yield space as well. We are shying away from CCCs and beyond.” All in all, Hense still sees a constructive investment landscape and opportunities to add alpha. Given the supportive stance taken by the Fed in particular, Hense is not anticipating a recession shock over the next six months, but nonetheless prefers a selective approach. It reminds Hense of a key RBC BlueBay mantra: “We work hard to pick out the winners, but also to avoid the losers, and it’s important to remember that these are both sides of the same ‘active management’ coin.”
A perfect storm
Finding beta, avoiding cockroaches
“The central bank is expected to purchase between $250bn and $480bn in relatively longer-dated Treasuries in response to tensions seen in the repo market”
Policy & Politics: Insights into the impact on investment decisions
Return to homepage
scroll
Learn more about RBC Bluebay and driving alpha opportunities for investors in 2026
“We have roughly $10trn in US short-term government debt below one year [and] the biggest buyers of these have been these tech companies, they own a good half of the money market,” explains Hense. “There is friction in the money market - on the one side there is more issuance but on the other side there is less demand from these Mag7 companies.” Inextricably linked to the Mag7’s presence in the bond markets is the massive debt demand that is funding their Artificial Intelligence (AI) capital expenditure plans. The scale of debt issuance involved is huge: With the likes of Facebook parent company Meta “printing $60bn in a week”, Hense expects aggregate AI capex funding issuance needs to increase globally on a net basis by up to US$800bn in 2026. Putting this huge debt issuance into perspective, Hense highlights it is important to take a holistic view into how tech innovation trends are driving these markets. “We know this earnings growth will come down over time in the Mag7; it's more a question of who the winners will be and who might actually have earnings in a more monopolistic structure as we have seen in the past,” says Hense. “As a total sector, certainly the earnings will not be met and that is the valuation risk at this point in time.”
“There is friction in the money market - on the one side there is more issuance but on the other side there is less demand from these Mag7 companies”
With the US Federal Reserve recently cutting interest rates to 3.50%-3.75%, further cuts – if rapid enough – could bring new uncertainty, but also fresh opportunity, to the outlook for US fixed income.
In December, US Federal Reserve (Fed) Chair Jerome Powell announced another 25bps interest rate cut to bring its target interest rate range down to 3.50%-3.75%, the lowest since 2022. When announcing the decision, Powell pointed to a cooling labour market as the reason for the cut, where the goal of maximum employment is one half of the Fed’s dual-mandate, alongside stable prices. But with attention now turning to 2026, some bond investors are watching the central bank’s next steps even more closely.
Malin Rosengren
Malin Rosengren, RBC BlueBay Asset Management fixed income portfolio manager, is one such investor and warns that excessively quick cutting by the Fed could present challenges for an otherwise positive economic outlook. “If the Fed cuts too quickly, then you could see something similar to what we saw in the 1990s where they have to pivot back go towards hiking quite quickly thereafter, given there isn’t a no growth downturn and you have to go the last mile of the cycle,” says Rosengren. “It's hard to get inflation down to target without a growth downturn. This is quite an unusual cycle where you do have both monetary and fiscal policy quite loose, and growth still well supported.” As such, Rosengren sees any Fed rate as lower than 3% as drawing concern over a potential “a policy misstep”. Given the Fed’s recent preference for cuts by 25bps cuts, and the lower end of the bank’s target interest rate range is already at 3.50%, this territory could be as close as the Fed’s March meeting, following the Fed’s first meeting of 2026 in late January. While the rate outlook remains a risk, it is not unusual for the Fed to have to grapple with such policy deliberations. Rather differently however, there is another risk which could be approaching for the US central bank, with Powell set to step down in May, which could be altogether much less familiar for markets.
Against this uncertain backdrop, Rosengren and her team are busy focusing on alpha and trying to identify and take advantage of asymmetry in the market. Tight valuations mean an active approach can help to identify such opportunities and take advantage of volatility as and when it appears. For the US, a particular challenge has been navigating the recent US government shutdown back in October-November, and the corresponding air-pocket in top-down data. “It’s more challenging for policymakers – and the market in general – to have a transparent read on the economy”, highlights Rosengren. Yet if this data gives rise to pricing discrepancies, Rosengren and her team will seek to try to take advantage of them. Beyond the US and developed markets, also on Rosengren’s radar are Emerging Markets. “We're looking for areas which have more attractive valuations or where higher volatility has opened up trades – such as Latin American countries going into election cycles,” explains the portfolio manager. “We’ve been more active in the local rates space where we're seeing more opportunities rather than just credit, given valuations.”
A nearing “policy misstep”
The risk of Fed independence
“An increasingly politicised Fed could risk introducing a new way in how monetary policy could be influenced – as well as interpreted by the market”
Scrutiny of the Fed has become increasingly politicised, with US President Trump a regular critic of the Fed’s decisions in 2025. The result is that an increasingly vocal White House has only fuelled more and more uncertainty around the future of Fed independence. This has led some investors to expect Trump to position his preferred candidates to replace Powell – such as his economic adviser, and National Economic Council director, Kevin Hassett. “If Hassett does come in and tries to instil a bigger non-recessionary easing cycle, then the market would very likely react,” says Rosengren “Depending on scale of the policy trigger, you could see a steepening curve and, with it, renewed questioning of the central bank's credibility, in all risking a weaker US dollar which would be inflationary.” It remains to be seen who replaces Powell, but an increasingly politicised Fed could risk introducing a new way in how monetary policy could be influenced – as well as interpreted by the market. Rosengren says this is “critical” for bond investors and could inspire a return of the debasement trade and divestment from the US seen in 2025. “The outcome wouldn’t do much to help with affordability issues in the US. Dollar weakness would further add to inflationary pressures while a steeper yield curve would continue to subdue the housing market,” adds Rosengren. “This brings us to mid-terms where Trump has been more concerned over affordability, given he’s lost voter support over the issue. It’ll be a test to see what’s more important.”
Finding the right opportunities
2025 was an eventful year, with tariff-led market volatility in April giving way to a calming of trade tensions. Key investment themes during the year included a weakened US dollar, EM strength, rising defence spending in Europe, and shifting geopolitical alliances. In 2026, AI continues to be a leading theme and dominates headlines, as technological innovation transforms sectors and influences capital expenditure and growth. With economic regime changes underway, the world continues to look uncertain, and skilled active managers should have ample opportunity to generate outperformance. Read about RBC BlueBay's approach to global markets in 2026 by clicking on the links below.
Mark Dowding, BlueBay CIO
Global Fixed Income
“The US deficit is projected to decrease slightly in 2026, thanks to increased tariff revenue. However, concerns about long-term debt sustainability remain, particularly in countries like the UK and France”
Download RBC BlueBay's Global Market Outlook
Polina Kurdyavko, Head of Emerging Market Debt
Emerging Market Debt
“In addition to the improving fundamental outlook in EM, we believe the technical tailwinds will remain in play in 2026, as investors seek to diversify their portfolios away from core markets, and global investors, who remain under allocated to the asset class, search for diversification and yield pick-up…”
Jeremy Richardson, Senior Portfolio Manager
Global Equities
“There are reasons to be optimistic about the outlook for 2026. Earnings estimates are forecasting another year of double-digit EPS growth, and if multiples stay where they are, this should lead to satisfactory returns for equity investors…”
Sid Chhabra, Head of Securitised Credit, CLO Management and European High Yield
High Yield
“AI remains a key theme, both as a source of capital expenditure funding and as a driver of opportunities and challenges across industries. The best of private credit will continue to transition into public markets as companies seek to diversify their lender base...”
Read the full market analysis
Markets are still growing accustomed to heightened uncertainty across a range of issues as the US adopts a more muscular, unilateral, and transactional approach to trade, international conflicts and its own alliances. Below, RBC BlueBay explores developments from last year to pick out trends that might persist in the future and examine where the likely flashpoints could arise in 2026.
Few Asian countries wish to make an outright bet on Washington or Beijing, as many fear the consequences if the geopolitical rivalry gets out of control. So far, most of their diplomatic rhetoric remains calculated and conciliatory to both China and the US, hedging their bets in the hope of retaining their own strategic autonomy. India views itself as a major power that is too significant to be aligned either with US or China. It seeks to play them off each other to maximise its own strategic leverage. For example, when the border dispute with China intensified, India joined the Quadrilateral Security Dialogue (Quad) along with Australia, US, and Japan. When Trump imposed 50% tariffs on India for importing Russian crude, Modi swiftly made an appearance at the Shanghai Cooperation Organisation summit, a China and Russia-led regional security organisation, to pose solidarity with Putin and Xi. Looking ahead, Modi’s BJP faces important state elections in 2026, which should shed light on his domestic footing and the strength of his position in forging global geopolitical alliances. Perhaps the most important events in 2026 will be China–US bilateral meetings, with Trump visiting Beijing in the spring and Xi to Washington later in the year, which should in theory anchor relations and offer a higher level of predictability.
Latin America
Europe is now realising, perhaps too late, that not only its values but its interests might diverge from Trump and MAGA
Click to explore each region in more detail, with insight on: How US policy could impact other EMs The key risks in 2026 The potential for high levels of differentiation in EMs
Latin America emerged relatively unscathed from the Liberation Day tariff announcements. The baseline 10% was applied almost uniformly. Mexico merits particular attention because its economy is most closely integrated with the US and because the US-Mexico-Canada Agreement (USMCA) trade agreement is such a key consideration. For other countries, though, it quickly became apparent that alignment with US priorities was a wise strategy. Colombia learnt this the hard way as early as January, when President Petro’s late-night complaint about the treatment of his deported compatriots immediately prompted the imposition of a 25% tariff on all the country’s exports to the US. The Brazilian government, meanwhile, was careful not to antagonise the Trump administration, but was punished regardless with 50% tariffs when its independent judicial system followed through with the prosecution of former president Jair Bolsonaro for his coup plot after he lost the 2022 election to Luiz Inácio Lula da Silva (Lula). A review of USMCA is due to conclude by mid-2026, but uncertainty over the future trading relationship will nevertheless remain high, undermining investment. We also expect the US push to chip away at China’s influence to remain a theme for the region in 2026.
Asia
Despite warm word of appreciation at the White House and grand state visits there is little doubt that Trump’s second term has ushered in a foreboding in Europe that his agenda is not only to disengage militarily from Europe, but to drive his own interests and priorities, including a focus on China (not Russia) as the prime global threat. Interests, not values, drive the Trump agenda, anathema to a European project which prides itself on supposed common values that it has tried to export via enlargement and trade policy. But Europe is now realising, perhaps too late, that not only its values but its interests might diverge from Trump and MAGA. However, even within Europe, there are competing political forces. Reform in the UK, the AfD in Germany, National Rally in France, Orban in Hungary, Fico in Slovakia, Nawrocki in Poland, and even Babis in the Czech Republic align more closely with Trump and MAGA. We have seen the rump European mainstream try and deploy (and withhold) resources to try and hold the line in defence of European social liberalism. In Romania and Moldova, this would suggest favourable treatment (and ample funding) from the European Commission towards new governments facing difficult reform challenges – much-needed fiscal consolidation in the case of Romania. Albania, Bulgaria, and the Tusk government in Poland get similarly favourable treatment from the EC. The future of stalled EU structural funds could shape hard-contested elections looming in Hungary in April 2026, while we will also be watching potential early elections in Serbia. In the Gulf, states are expected to continue opening up and reform agendas, and Trump’s effort to freeze Russia out of international oil markets could be an opportunity for Gulf producers.
CEEMEA
Sub-Saharan Africa
The Trump administration hasn’t tended to prioritise Sub-Saharan Africa, as the region is neither a major trading partner nor a geopolitical competitor. Cuts to aid in some ways evidence the less-than-positive focus on the region and contrast sharply with the support offered to nations such as Argentina. However, with the US seeking to source rare earths and compete with China, we have seen evidence of US intervention in the region where these policy priorities have some crossovers. Trump invited DRC and Rwanda to sign a deal to halt the conflict in the eastern DRC that involved Rwandan-backed troops. While there is uncertainty over the long-term success of the deal, it appears the Trump administration is seeking to calm the region and gain access to the DRC’s endowment of rare earth minerals. This may have other positive spin offs via investment into the region, but that is not guaranteed, and we have seen many examples of resource rich nations exporting commodities but failing to raise living standards for the population, due to weak governance and poor policy choices.
Few Asian countries wish to make an outright bet on Washington or Beijing, as many fear the consequences if the geopolitical rivalry gets out of control
Richard Farrell
It’s true that the performance of China and India often mirror each other, and there are some fundamental reason for this. First, 60% of India’s GDP is driven by consumption, one of the highest in EMs. In contrast China’s economic growth has been driven by investment funded by debt. Over the last 20 years this has meant the Indian stock market has been more of a secular consumption growth story, whereas China’s has been more cyclical dictated by the government policy. Another difference is the cost of capital. India has historically had a relatively insulated protectionist economy and a large bureaucracy, which has resulted in structurally higher inflation and a higher cost of capital. China in contrast has a much lower cost of capital due to its mercantilist, low friction economic strategy. This has resulted in structurally higher return on equity in the Indian market versus China China due to this higher cost of capital. In the last 10 years however, the Chinese stock market has gradually shifted to technology and internet related stocks whereas the Indian stock market has no meaningful AI story and remains dominated by financials and consumer sectors. This means that in 2026 China and India’s relative performance is likely to be driven by AI one way or another.
Two areas we are invested in that we expect will benefit from this trend but believe is currently underappreciated by the market, are electric vehicles and travel. EV penetration is still extremely low in India, but as the cost of EVs comes down and disposable income increases, we expect accelerating sales, especially in more affluent urban areas where charging infrastructure is more developed. We also expect demand for experiences such as travel and tourism to grow rapidly helped by the rapid growth of India’s airline and hotel industries.
India has been positioned as a counterweight to China in recent years. Is this still the case in 2026?
Can India sustain its 6–6.5% growth?
Retail inflows [have] pushed valuations beyond realistic growth expectations, especially in the small and mid-cap space
In terms of GDP per capita, India is starting from a low base. Since 2014, the government has introduced several economic reforms such as the Aadhaar digital ID programme, demonetisation, and the Real Estate Regulation and Development Act, all designed to reduce fraud and tax evasion. They also introduced the Goods and Services Act to reduce and streamline inter-state tax collection and updated the Insolvency and Bankruptcy Code to clean-up bad debts in the financial system. All these measures have helped to liberalise the economy, lower inflation and increase growth. To continue to grow the economy above 6%, the Indian government needs to focus on the industrial sector, particularly manufacturing. The Make in India programme is designed to do just that, increase India’s manufacturing share of GDP from 16% to 25% by 2030. To do this, the government needs to continue to invest in infrastructure.
Which underappreciated sectors could benefit most from India’s premiumisation and rising demand for services and experiences?
Is India’s valuation premium still warranted?
India has historically traded at a premium to the rest of EM because of its higher growth and return on equity. However, in 2024 we went underweight India for the first time since the inception of our EM Equity fund in 2010, purely on concerns around valuation. We felt retail inflows had pushed valuations beyond realistic growth expectations, especially in the small and mid-cap space. Since then, valuations have moderated as the economy has cooled and retail flows have slowed but are still above long-term averages. We do see pockets of attractive valuations however, particularly in financials and IT services. That said, we do think that India’s fair value is at a premium to other EM markets, not only because of its superior growth and returns, but additionally its relative political stability. Modi’s BJP party did lose its overall majority in 2024, but its NDA coalition did manage to maintain control. This means investors can expect policy continuity for at least another 4 years.
For advisers building EM exposure, should India be a core holding or more of a tactical play?
As long-term investors focused on areas of long-term structural growth, we very much see India as a core part of our EM portfolio due to its emerging middle-class. If valuations improve or growth accelerates again, we will go overweight India. Being overweight India for most of the life of the fund has served us well. In the short-term risks centre around geo-politics as the Modi government tries to maintain a neutral stance between the US and China. The recent trade deal with the US has reduced this risk for now but stopping Russian oil purchases may negatively impact the economy this year via higher inflation. The main risk to the long-term investment thesis is if the government’s economic reform agenda stalls, particularly as it relates to the Make in India initiative. Vitalising India’s industrial base is critical to generating enough new jobs for the roughly 10 million new graduates per year, especially in the context where AI could jeopardise entry level knowledge work in the IT services industry. From a longer term perspective, we continue to view India as one of the most compelling structural stories in EM. The country offers superior growth prospects given its attractive demographics and low penetration rates across many areas. India has the lowest urbanisation rate in EM, but rapid growth is expected, from around 30% today to over 50% by 2050. Meanwhile, from a bottom-up perspective, the quality of corporates really stands out with a higher proportion of compounders and superior Return on Equity compared to other EMs.
In 2026, China and India’s relative performance is likely to be driven by AI one way or another
In a market environment with tighter spreads and geopolitical volatility rising, strategies that are diversified and offer attractive income are resonating with investors. Tom Mowl, BlueBay Senior Portfolio Manager, Securitised Credit & CLO Management explores what these assets look like
Tom Mowl
Yes, we are seeing increasing interest from investors looking for alternative asset classes that offer lower correlations to more traditional fixed income and equities. In securitized credit, across the risk spectrum the asset class provides exposure to alternative sources of risk, such as consumers, alongside having low interest rate duration which makes the asset class a good complement to traditional assets. Investors are seeking predictable and alternative sources of carry with structural protections. In the liquid high grade space, strategies can play a key role as cash enhancement vehicles offering an attractive spread pick up, very high credit quality and low drawdowns. Investment grade securitized provides an attractive complement to traditional IG corporates; with diversified strategies offering shorter spread duration, floating rate exposure, an attractive spread pick up and protection from single name stress alongside high credit quality. In the illiquid space, strategies investing in capital call loans are gaining traction as a diversifier to corporate risk factors, here exposure to tier 1 sponsors can provide very high quality risk with an attractive spread pick up vs IG assets driven by the illiquidity premium.
When it comes to liquidity investors always have a need for liquid assets, and in that space securitized credit offers a compelling solution given the attractive spread pick up even in the very liquid high quality part of the capital structure. Some investors are willing to have lower liquidity allocations and in some cases lock up capital, but the demand for an appropriate spread pick up has increased. In areas like direct lending for example, we have seen a trend of spread compression versus the public broadly syndicated loan market which suggests the illiquidity premium is not as compelling. There is demand for high quality assets that offer a spread pick up and some investors are willing to move into illiquid assets to access the premium, and here capital call loan strategies can provide a unique solutions.
Are institutional investors becoming more interested in decorrelated assets than before?
Between systematic macro, market-neutral, ILS, and alternative income, which is currently the most popular choice for diversification, and what is the main reason why?
In our experience, investors are looking for asset classes that can complement their existing asset allocations, offer lower correlations, and provide an alternative source of income
From our perspective, we are seeing alternative income as a key theme resonating with institutional investors. In a market environment with credit spreads on the tighter end, periods of volatility and rising single name stress strategies that are diversified, active and offer attractive income are resonating with investors.
Do investors currently prefer the quick liquidity of strategies like systematic macro, or are they more willing to lock up capital in alternative income to get higher returns?
Is the shift toward these niche strategies driven by a need to protect against market crashes, or are investors simply looking for new sources of yield that don't depend on the economy?
We wouldn't refer to securitized credit as a niche strategy, given the market size is multiple trillions and growing. Ultimately the asset class will be driven by broader macro moves, but the compelling characteristics such as short spread duration, strong collateral and structures, protection from single name credit events and natural de-leveraging offer compelling benefits versus traditional credit. The capital call loan space is a more niche strategy, whilst it's a large market it has traditionally only been banks that have access. The increase in strategies offering this as a unique solution is very compelling for institutional investors as an alternative source of income in very high quality assets that are not linked to broader credit and equity.
Given the current geopolitical volatility being seen in some areas, what sort of market environments does this asset class work best?
In our experience, investors are looking for asset classes that can complement their existing asset allocations, offer lower correlations, and provide an alternative source of income. Uncertainty is likely to remain high this year, however our outlook for securitised credit for 2026 is positive. Ultimately the asset class will be driven by broader macro moves, but its compelling characteristics such as short spread duration, strong collateral and structures, protection from single name credit events and natural de-leveraging offer compelling benefits versus traditional credit.
There is demand for high quality assets that offer a spread pick up and some investors are willing to move into illiquid assets to access the premium...
Five takeaways for European bond markets
RBC BlueBay’s portfolio manager Neil Mehta analyses the five key elements shaping the broader picture for European macro and bond markets
Neil Mehta
Europe's interconnectedness and lack of energy reserves have left it exposed to global market fluctuations. Furthermore, European capitals remain largely absent from Washington's negotiations shaping the Middle East's energy stability. Summer air travel disruptions will hamper European tourism, a key mechanism for North-South economic transfer within the Eurozone. The risks are clearly shifting toward a worsening energy crisis as the conflict drags on. Stagflation appears increasingly likely, while supply constraints exacerbate demand destruction. Geopolitical instability combined with structural energy vulnerability is creating a perfect storm, in a difficult period for European growth.
Political stability, debt consolidation efforts, and a broadening regional investor base had led BTPs to trade below 60 basis points earlier this year. As a Eurozone energy importer dependent on LNG, Italy remains structurally vulnerable and risks seeing growth slide from +0.5% in 2026 into flat or negative territory if volatility persists. This year's deficit risks widening beyond the 3% forecast. BTP volatility is high compared to historical norms, eroding the logic of the volatility-adjusted carry trade. The government elected in 2022 is under pressure for the first time, and fuel price cuts signal political pressure to manage voter expectations, a temporary fix only. We believe it is unlikely that pre-conflict assessment levels will be reached again in this context; this would require greater European integration over a much longer timeframe.
1. The conflict in the Middle East has rocked European economies, with higher inflation, lower growth on the way and policymakers in limbo.
2. We expect the ECB to raise rates in June and September, given its unique objective of preserving price stability.
“The demand destruction that follows rising prices should help limit a further sell-off in short-term yields, all else equal”
See more RBC BlueBay insights
At the onset of the Middle East conflict, ECB members were quick to highlight potential inflationary risks, in order to limit the overall size of the necessary rate hikes. The ECB held steady in April, but discussions were firmly geared toward paving the way for a rate hike at the next meeting. The experience of 2022 suggests we'll likely see a reversal of some of the 2024/25 cuts. However, given the pessimistic growth outlook, it wouldn't be surprising if these moves were subsequently reversed in 2027. The demand destruction that follows rising prices should help limit a further sell-off in short-term yields, all else equal.
3. Italian BTP spreads have widened to over 75 basis points over German Bunds and are now on a more unstable footing given the post-conflict outlook.
Euro area consumer price inflation expectations three years ahead Annual % changes
Source: ECB, as of April 2026
Italy: less debt... less growth
Source: The Economist, as of April 2026
4. Despite the protracted conflict and the continuing accumulation of economic concerns, it is striking how resilient European credit spreads remain.
The iTraxx Crossover Index is trading below 280 basis points, down from a high of 362 basis points at the end of last month, when crude oil prices and German Bund yields were last at this level. During recession fears in 2022, spreads exceeded 600 basis points. They remained above 400 basis points until the end of 2023. Current prices suggest substantial complacency, given the intensifying headwinds. Retail flows into equities (particularly in the US) are masking deteriorating credit fundamentals, a disconnect that is unlikely to persist as earnings growth stalls and energy shocks worsen. From our perspective, this points to an element of overconfidence, with spread risks in the region currently tilted asymmetrically to the upside.
ITraxx Crossover Index
Source: Bloomberg, as of April 2026
5. The Bank of England’s (BoE) scenario analysis at the last MPC meeting was an attempt to "take back control".
Bailey was eager to address what had been perceived as sloppy communication at the previous meeting by introducing a more robust framework for energy prices and the potential second-round effects from the shock. At one point in March, the market was pricing in four increases for this year. Comparisons with 2022, after which the BoE raised rates to a peak of 5.25%, have been scaled back. The argument is that the labour market is weaker now and the starting point for inflation is lower than in 2022, reducing the effectiveness of the current price shock. The most extreme scenario, in which the key rate would have to return towards 5%, cannot be ruled out, given the UK's structural weaknesses and the public's willingness to accept higher inflation levels. Near-term upside expectations appear excessive under current conditions, but until we have a clearer view of where inflation will peak, betting on a bullish gilt is premature. Economic policy decisions will be influenced by policymakers' views on the trade-off between the speed with which inflation returns to target and the volatility of output.
Illustrative model-based policy projections
Source: BoE MPR, as of April 2026 All data is from Bloomberg and is current as of April 2026, unless otherwise indicated.
Budget deficit, % of GDP
2020
22
25
-12
-9
-6
3
0
Real GDP, % of change on a year earlier
-20
-10
10
20
Bank rate
Scenario A
Scenario B
Scenario C
Median
Mean
278.115
Leveraged finance: Risks, returns and resilience
How has the leveraged finance market evolved in recent years, and why does active management remain important amid concerns over private credit? We hear from RBC BlueBay’s leveraged finance portfolio managers.
Ashley Wright
High yield (HY) bonds are sub-investment grade corporate debt issued predominantly in US dollars or euros that offer investors an attractive credit-risk premium. The global HY market is now around $2tn in size, with around 60% of the market made up of senior secured bonds, and the average credit rating has improved over the past five years to BB. Unlike government bonds or investment-grade credit, HY returns are driven less by interest rate moves and more by company-specific fundamentals, which can provide valuable diversification within a broader fixed income portfolio. From a risk-adjusted perspective, HY has historically compared favourably with equities, emerging markets and investment-grade (IG) credit.
The loan market has seen significant growth in recent years, both in the US and Europe, and is now a similar size to the HY bond market at roughly $2tn. The asset class is slightly lower quality than HY, with an average rating of B versus BB in HY bonds. Investors can gain exposure in two main ways: either directly via SMAs (separately managed accounts) or through securitised credit such as CLOs (collateralised loan obligations). CLOs are publicly rated, highly regulated and diversified vehicles that provide broad loan exposure. SMAs, by contrast, have fewer constraints, allowing managers to be more tactical and generate more alpha through active positioning.
If you were talking to a client who was thinking about allocating to HY bonds for the first time, how would you position it relative to other asset classes?
Is the additional running yield offered by HY sufficient to protect investors from the higher losses that presumably result from bonds defaulting?
“The capital charge on AAA-rated class A notes is expected to fall at the start of 2027, which could provide a tailwind for both CLOs and the leveraged loan asset class”
Default rates in Europe over the last 10 years are just over 2%, and below 3% in the US, so they are fairly low. Overall, the quality of the universe is higher now, and the composition of the asset class has changed: HY is mainly dominated by repeat issuers, with a large portion having public listings. That means more conservative balance sheets and financial policies, such as sensible allocations of free cash flow between dividends and deleveraging. Additionally, HY companies are mostly regional companies without complicated supply chains. Given the higher coupons and lower default rates, you end up with an attractive excess spread. Over the last three, five or seven years, HY has outperformed IG by a decent margin.
Moving on to the loans market, what are the different types of loans that exist, and how would an investor who is not part of the bank syndicate obtain exposure to them?
Are there structural issues within the loans market that have been driving either increased supply or investor demand?
CLOs account for the bulk of the loan market, and we’ve seen dramatic growth in CLOs over the last five years. The European CLO market doubled in size from roughly $150bn in 2020 to around $300bn today. This has meant that technicals for the loan market have remained very strong, with demand continuing to be well supported. There have also been changes announced to capital ratio requirements under Solvency II for insurance investors investing in CLO liabilities. For example, the capital charge on AAA-rated class A notes is expected to fall significantly at the start of 2027, which could provide a meaningful tailwind for both CLOs and the leveraged loan asset class more broadly.
With defaults rising in private credit and redemption requests increasing, do you worry this could create broader issues across leveraged finance?
Yes and no. More credit available to the economy is a good thing. Too much leverage is a problem, particularly when you are lending long and borrowing short, which is what’s happening in private credit, where redemption liquidity desired by investors is bumping against the fact these are illiquid long-term assets. If all investors asked for their money back, even if it played out over multiple years, that would be a significant drain of credit from the system and could create a macro drag across credit markets. But if we are describing a slower deflation of the asset class after a sharp run-up, then while significant, it won’t be systemic. Investors have also become more concerned about underwriting standards, AI and software exposure, and the fact private credit portfolios are static and less transparent. Public markets, by contrast, are transparent, diversified and actively managed. Over time, we could see some transition from private credit into public market refinancing, with higher-quality assets migrating into public loan markets.
Tim van der Weyden
Once viewed as a speculative corner of fixed income markets, leveraged finance has evolved into a more mature and institutionalised asset class by 2026. Amid renewed scrutiny of leverage and liquidity following recent turbulence in parts of private credit markets, Ashley Wright and Tim van der Weyden, Leveraged Finance Portfolio Managers at RBC BlueBay Asset Management, discuss how the high yield bond and leveraged loan markets have evolved, and why investor perceptions may not always reflect market reality.
“Investors have short memories” is an overused phrase for a reason: markets keep proving it true. Today, one does not have to rely on memory alone to see that politics, geopolitics and societal tensions will continue to affect global markets in a systemic way — one that can be anticipated, if not predicted. The shocks unsettling markets are signs of deeper transitions that can no longer be treated as background noise, whether it is wars affecting global energy supplies or mounting backlash against globalisation, immigration and now artificial intelligence. The issue, says Mike Bell, Head of Market Strategy at RBC BlueBay Asset Management, is that markets have been conditioned by decades of benign globalisation to systematically underprice politics. As a result, they tend to underestimate how profoundly politics can influence both supply and demand across the global economy. “International politics clearly can affect the supply side of the global economy in that it can cause a disruption to oil markets or gas markets. If economics is supply and demand, then to say that something that can influence supply isn't relevant is clearly wrong,” Bell says. So why do markets keep mispricing political risk, or dismissing it as temporary? Back in early 2022, markets largely shrugged off the huge accumulation of troops and tanks on the Russian border with Ukraine as an unlikely sign that an invasion would actually happen. Today, equity markets are pricing in the reopening of the Strait of Hormuz within weeks, if not days, despite one of the biggest energy supply shocks in recent history and little sign of a successful diplomatic resolution. According to Bell, markets struggle to price political risk because they tend to see it as binary: either the disruption happens, or it does not. As long as it has not happened yet, many investors prefer to stay invested rather than position for a scenario that may never materialise.
Mike Bell
What has changed in recent years, according to Bell, is the broader backdrop against which these shocks are happening. Investors are used to operating in an environment defined by globalisation, expanding labour forces and relatively stable geopolitics. That helped keep inflation low, supply chains efficient and political risks manageable for markets. However, that backdrop is now changing on several fronts at once. On the geopolitical side, the global order itself has become less stable as the US has grown more reluctant to commit to long foreign interventions. As American voters have tired of “forever wars”, other countries are testing the boundaries of what they can do militarily or economically without triggering a major US response. This is happening at a time when competition for energy, commodities and strategic resources is becoming much more explicit. “We all lived under this pretence for a while that countries were not acting in their own economic interests,” Bell says. “Now it’s much more out in the open.” At the domestic level, many developed economies are also dealing with the political consequences of globalisation. Manufacturing jobs that once supported middle and working-class communities have disappeared across much of the developed world, weakening bargaining power for many workers and contributing to rising frustration around immigration, inequality and living standards. According to Bell, these are not isolated shocks and it’s the same pattern across most major economies. Another major transition markets may be underestimating is demographics. “Basically, what markets do is extrapolate the past,” says Bell. “They think stocks have gone up a lot over the last 15 years, therefore they'll go up a lot over the next 15 years. But it just so happens that we're at a demographic turning point now.”
The stage props are changing
“International politics clearly can affect the supply side of the global economy in that it can cause a disruption to oil markets or gas markets”
Investor thinking has also been influenced by a long period in which many political shocks ultimately proved manageable for markets, particularly during the post-2009 bull market. That reinforced the idea that politics could largely be ignored. But not all political shocks affect markets in the same way. While some create headlines without materially affecting the economy, others — particularly those tied to energy, trade or inflation — can materially impact growth, bond markets and corporate earnings. Bell points to events such as the 1973 Arab oil embargo following the Yom Kippur War and the 1979 Iranian Revolution, both of which disrupted global oil supplies and contributed to years of higher inflation, weaker growth and market volatility across developed economies. More recently, Russia’s invasion of Ukraine exposed how quickly geopolitical tensions can feed through into energy prices, inflation expectations and monetary policy. According to Bell, the mistake markets often make is assuming that all political shocks will fade quickly simply because many have in the recent past.
“When troops start to amass on the border of an energy-producing region, investors should pay more attention than they seem to”
According to UN projections, working-age populations across much of Europe and East Asia have either peaked or are expected to decline in the coming years after decades of expansion. This includes some of the world’s most populous nations, such as China, Germany, Japan and the Russian Federation.[1] At the same time, the large positive supply shock created by China’s integration into the global economy is fading. Artificial intelligence could complicate the picture even further. While AI promises major productivity gains, Bell says markets may be underestimating the political and economic consequences if the technology leads to meaningful job displacement. “Do people retire quicker than AI replaces jobs or does AI replace jobs quicker than people retire - that is ultimately the key question,” says Bell. If that transition leads to rising unemployment or weaker bargaining power for workers, political backlash is likely to follow, he continues. And with government debt levels already high across many developed economies, policymakers may have less room to soften the social and economic impact than they did in previous crises. For Bell, integrating political risk into investment strategies does not mean making aggressive bets against the market every time geopolitical tensions rise. But it does mean paying closer attention when risks are clearly building and avoiding portfolio positions that could significantly underperform if those risks materialise. “When troops start to amass on the border of an energy-producing region, investors should pay more attention than they seem to,” Bell says. “Don’t position yourself so that if a risk that is really quite clearly building happens, you’re going to significantly underperform,” he says. “Politics should not be ignored.” [1] https://population.un.org/wpp/assets/Files/WPP2024_Summary-of-Results.pdf?utm_source
According to UN projections, working-age populations across much of Europe and East Asia have either peaked or are expected to decline in the coming years after decades of expansion. This includes some of the world’s most populous nations, such as China, Germany, Japan and the Russian Federation.1 At the same time, the large positive supply shock created by China’s integration into the global economy is fading. Artificial intelligence could complicate the picture even further. While AI promises major productivity gains, Bell says markets may be underestimating the political and economic consequences if the technology leads to meaningful job displacement. “Do people retire quicker than AI replaces jobs or does AI replace jobs quicker than people retire - that is ultimately the key question,” says Bell. If that transition leads to rising unemployment or weaker bargaining power for workers, political backlash is likely to follow, he continues. And with government debt levels already high across many developed economies, policymakers may have less room to soften the social and economic impact than they did in previous crises. For Bell, integrating political risk into investment strategies does not mean making aggressive bets against the market every time geopolitical tensions rise. But it does mean paying closer attention when risks are clearly building and avoiding portfolio positions that could significantly underperform if those risks materialise. “When troops start to amass on the border of an energy-producing region, investors should pay more attention than they seem to,” Bell says. “Don’t position yourself so that if a risk that is really quite clearly building happens, you’re going to significantly underperform,” he says. “Politics should not be ignored.” Source 1. Population.un.org
Why go global in IG credit?
Global investment grade bond markets offer investors a broader opportunity set and greater flexibility than focusing on a single region alone. In this article, RBC BlueBay Asset Management explores why total return matters more than headline yield, and how expanding the investable universe can improve long-term risk-adjusted outcomes.
Most UK investors predominantly invest in sterling rather than global investment grade (IG) credit, despite taking a much more global approach with their equity investments. But we think it makes sense for many investors to diversify their sterling corporate bond exposure with an exposure to currency hedged global IG credit. Here’s why: FX risk can be hedged: investors can effectively neutralise the currency risk of investing in foreign bonds by hedging the FX risk. Reduce home bias, reduce recession risk: the sterling IG index has a bias towards UK and European companies, and away from US companies. Europe and the UK have had recessions without causing recessions in the US, whereas US recessions have generally caused recessions in Europe and the UK too. A larger and more liquid opportunity set: limiting oneself to sterling IG credit dramatically narrows the universe of available issuers and securities. The global IG market is also more liquid and the sterling high yield market is small, limiting its capacity to comfortably absorb fallen angels.
Rather than only buying sterling IG credit to eliminate currency risk, investors can buy the developed-market IG corporate bonds they deem most attractive from anywhere in the world, after taking currency hedging costs into account. Successful credit investing is about much more than just picking the highest yielding bonds after factoring in hedging costs, otherwise anyone could be a star credit investor. Higher yields can reflect higher government bond risk (rate, fiscal and political) or higher corporate credit risk. Higher yields can sometimes still rise further and deliver weaker total returns than lower yielding bonds. The key is to assess the overall value of a bond taking the government bond yield, the credit spread and the currency hedging cost into account. One must also compare equivalent credit and duration risks to ensure one is comparing apples to apples.
Interestingly, the sterling IG corporate bond market is not only much more exposed to UK risk than the global IG corporate bond index, but it is also more exposed to Eurozone and French risk. This bias away from the US can really matter because while it’s very unusual for the US to experience a recession without the UK and Europe also entering recession, it’s perfectly possible for the UK and/or Europe to experience a recession without the US also going into recession. The Eurozone for example experienced a sovereign debt crisis and recession in 2012, whereas the US avoided a recession and crisis. With the US dollar the world’s reserve currency, and its debt denominated in a currency which it can print, the US is less exposed to potential sovereign debt crises than some Eurozone countries or the UK.
FX risk can be hedged
Reduce home bias, reduce recession risk?
“Successful credit investing is about much more than just picking the highest yielding bonds after factoring in hedging costs, otherwise anyone could be a star credit investor”
The sterling corporate bond market comes with a huge bias away from US and towards UK companies, including a significant number of domestically focused firms. Interestingly, the sterling IG corporate bond market is not only much more exposed to UK risk than the global IG corporate bond index, but it is also more exposed to Eurozone and French risk.
A larger and more liquid opportunity set
Percentage of issuers in each index domiciled in selected countries/ regions (%):
Source: iShares (CRHG) holdings for global and Bloomberg for sterling, data as at 3 July 2026. Eurozone big 5 refers to Germany, France, Italy, Spain and the Netherlands.
Limiting oneself to issuers who issue in sterling also dramatically limits one’s opportunity set.
This results in a number of drawbacks: New issue premiums - the extra yield offered by an issuer when issuing a new bond to entice investors to buy it over an existing bond - are a significant source of potential credit alpha. There are simply far fewer new issues available in sterling compared to the global investment grade market given the far larger number of issuers and issues in the global market. One cannot express views on the outlook for bond yields/rates anywhere other than in the UK if you only invest in sterling credit markets. This eliminates the opportunity set that can come from being able to express relative value views on the outlook for bond yields across countries. Sterling IG credit is less liquid than the far larger US and Euro denominated IG markets. This reduces active managers’ ability to add alpha. The Sterling High Yield bond index is also very small. This increases the price risk to bonds that get downgraded from IG to high yield in the next recession. In a recession, the capacity of the local high yield bond market to absorb downgraded fallen angels matters. If the volume of previously BBB rated bonds that get downgraded overwhelms high yield investor demand in that currency, then it could lead to sharp price declines for downgraded bonds.
The rising share of the IG indices which are BBB rated also emphasises the importance of being able to actively select the most attractively valued BBB rated bonds that the portfolio manager believes can avoid being downgraded in a recession. The larger the opportunity set, the better chance one has of identifying attractively valued bonds that won’t get downgraded.
Number of issuers in the global and sterling IG corporate bond indices:
Source: Bloomberg. Data as at 30 June 2026
The proportion of IG indices which are BBB rated has increased in recent years:
Source: Bloomberg. Data as of 30 June 2026
The size of BBB rated IG bonds relative to HY bonds is much larger in sterling:
High real yields and improving fiscal credibility have made Latin America one of the more attractive opportunities in global fixed income over the past year, and this year's run of presidential elections in the region has only reinforced that. Colombia and Peru have both pivoted to right-wing, market-friendly presidents, whereas Brazil may opt for continuity in October, with incumbent Lula leading narrowly in the polls. What matters now from the sovereign debt point of view is whether the fiscal policy follows, according to Graham Stock, Senior EM Sovereign Strategist at RBC BlueBay.
Graham Stock
While both Colombia and Peru offered voters a polarised choice between a market-friendly candidate on the right and an interventionist on the left, the consequences of the outcome were far greater in Colombia. Four years of fiscal loosening under Gustavo Petro were manageable, but, as Stock puts it, another four “would do terminal damage to the debt dynamics in the country.” Abelardo de la Espriella's narrow win over Iván Cepeda was therefore met with a sigh of relief on the part of market participants. However, the new president has no majority in Congress, and since any credible consolidation runs through tax reform, building a coalition to pass it will take more political dexterity than de la Espriella has shown so far in a short political career, says Stock. According to Stock, two things are worth watching in Colombia after the 7 August inauguration: how much political and financial capital will be used up in responding to the August 10 earthquake; and whether the government will be able to implement additional spending cuts to rein in the projected 2027 budget deficit. The president-elect's early announcements are also being closely followed by investors. De la Espriella pledged to cut the public sector wage bill by 40%, but even if he were to do that, it would save less than a percent of GDP in budget deficit, because the wage bill is only around 2.5% of GDP in total, says Stock.
If the race tightens, the currency, local rates and hard currency debt are expected to rally on the prospect of a Bolsonaro win, according to Stock. For investors who doubt that outcome will materialise, that rally is a chance to sell into it: long dollars against the real, paying rates and underweight hard currency debt, he says. On the base case that Lula is re-elected, local rates look attractive, with five-year rates close to 14.5% against inflation of 4.5–5% leaving a real yield near double digits, according to Stock. “We don't get that anywhere else in emerging markets,” says Stock. Hard currency debt is tight by comparison, though Brazil's small stock of dollar bonds means default risk is low, he adds. Under a second Lula term, investors will look for the 2027 budget to respect the fiscal rules already in place, lifting the primary surplus from 0.25% of GDP to 0.5%. They will also watch whether campaign promises are implemented at modest scale or in full, says Stock.
Colombia is where the stakes were highest
Brazil: bigger market, different question
“Under a second Lula term, investors will look for the 2027 budget to respect the fiscal rules already in place, lifting the primary surplus from 0.25% of GDP to 0.5%”
Upcoming elections in Brazil in October arguably matter more because of the size of its economy. It is a $2tn economy with debt-to-GDP near 85%, and, although most of that debt is domestic, Brazil remains an important hard currency market for international investors, according to Stock. Continuity there would be tolerable, given that the government is running a balanced primary budget and the debt trajectory, while it has deteriorated, is “by no means explosive,” according to Stock. The polls, which tend to be reliable in Brazil, have consistently shown Lula around four points ahead of Flávio Bolsonaro in a runoff, and with the economy doing well and Bolsonaro's campaign struggling to build momentum, that lead is expected to hold. “We're already pricing a pretty high probability that Lula wins re-election in October,” says Stock. The campaign does not intensify until September, however, so the outcome is still far from settled. Flávio Bolsonaro portrays himself as the market-friendly choice and has sympathy from local investors, though more for where he sits politically than for his economic policy, says Stock. There is a precedent for scepticism: the last Bolsonaro government had a finance minister the market liked, and a deficit that grew regardless. “I think it would be a mistake to assume that Flávio would deliver a meaningful adjustment either,” says Stock.
The regional picture
“Two things are worth watching in Colombia after the 7 August inauguration: 1) how politically and financially costly the August 10 earthquake will prove to be; 2) implementation of the 2027 budget and financing plan proposed in late August”
When it comes to broader themes in Latin America, fiscal considerations remain the priority for sovereign debt investors, according to Stock: is the deficit widening or narrowing, is it consistent with sustainable debt, and if not, how much extra issuance and yield pressure follows? Some countries in the region are currently benefitting from higher commodity prices, supported by tensions in the Middle East and disruption around the Strait of Hormuz. Colombia, Ecuador and increasingly Argentina – which is developing the Vaca Muerta shale oil and natural gas field in Northern Patagonia – are seen as the biggest beneficiaries, says Stock. Geopolitically, the election winners in Colombia and Peru are aligned with Washington, which nowadays carries significant political and economic consequences, according to Stock. It's not as straightforward in Brazil, where the US is more aligned with Flávio Bolsonaro, but where each US intervention has so far done the opposite, lifting Lula and damaging Bolsonaro. Alongside Colombia, RBC BlueBay sees Argentina as an interesting opportunity in the region, says Stock. Investor attention is now turning to the country's 2027 elections and whether Milei's reform programme survives them.
