Global high yield: when risks overlap in 2026

This article is an extract from our Q2 2026 Active Fixed Income Outlook.

The past – what just happened? 

Markets entered the first quarter of 2026 with firmer risk appetite, supported by resilient macro data and sustained demand for income. However, geopolitical tensions in the Middle East and ongoing adjustments in AI-exposed software names kept volatility elevated and contributed to greater dispersion across markets.

The knock-on effects of the conflict were most visible in oil and gas, with secondary impacts across diesel, kerosene, fertilisers and industrial chemicals. These pressures were felt most acutely in Europe and parts of Asia, where energy dependency 
and supply-chain sensitivity are notably higher.

In this environment of heightened volatility, investors have generally preferred to stay cautiously invested rather than meaningfully de-risk, consistent with the absence of large outflows or recession signals. From a ratings perspective, so far this has translated into a preference for higher-quality carry, with BB credits modestly outperforming B-rated issuers.

The present – prioritising liquidity and quality in a more fragile market

We entered February with a positive stance. However, this was revised down to neutral stance on midway through the month, reflecting relatively tight spreads and a balanced assessment of risks and opportunities. At the beginning of March, we 
moved the strategy to -1, as the escalation of Iran-related geopolitical risks added to a market already navigating AI-driven disruption, credit stress in software and direct 
lending, and a generally more fragile macro environment. In our view, these developments increase the likelihood of spread widening from here, with our base case now centred on moves towards the 10th-40th percentile range, and as much as 100-150bps of widening in more stressed scenarios. A tightening episode over the next three to six months appears more of an upside case.

Against this backdrop, we have raised liquidity in most portfolios, focusing on reducing exposure to CCC and D-downside credits and reallocating selectively towards higher-quality B-downside opportunities. We are also actively reviewing industry positioning in light of evolving sector-level risks. However, we maintain our overweight exposure to higher spread energy names, which should benefit from this environment. 

Our effective beta is expected to move closer to neutral, reflecting a more cautious position in the current environment. Under normal conditions we would aim to generate more income than the benchmark, but we are temporarily forgoing 
some of this additional carry in light of what we view as an elevated risk of spread widening.

Outlook – a more cautious stance as layered risks build  

Our current global high yield stance is more cautious than it was earlier in the year. We moved from a neutral view to a negative score because the balance of risks has shifted: markets are now contending with several pressures at the same time, including heightened geopolitical uncertainty around Iran, ongoing disruption from AI, and pockets of credit stress in software and direct lending. When multiple shocks overlap, market behaviour can become non-linear – risk appetite and liquidity can deteriorate faster than fundamentals would imply.

Importantly, this is not a recession call. Rather, it reflects our view that spreads have limited room to tighten from already demanding levels, while the probability of a pull-back has increased. In the current environment, the balance of outcomes is skewed: we see greater potential for spreads to widen than to grind tighter over the coming months, with tightening now firmly an upside scenario. In short, the asymmetry is now working against us.

Regionally, Europe appears more exposed to the current set of risks, given its greater sensitivity to energy and gas prices and the broader knock-on effects. Corporate fundamentals remain broadly sound – supported by the region’s higher-quality mix, with over 70% of high yield issuers rated BB – but volatility and narrative risks are elevated. By contrast, the US is likely to prove more resilient if the shock remains primarily energy-driven. 

Given this backdrop, we are prioritising flexibility and downside management. We have reduced credit risk, increased liquidity and shifted the portfolio away from the most vulnerable lower-quality exposures, while redeploying selectively into higher-quality opportunities with shorter duration. We anticipate greater sector divergence and therefore looking at deploying that tactically across regions.

What could challenge our view and positioning?

A number of developments could shift the balance of risks and lead us to reassess our current more cautious stance:

• Geopolitical risks recede and energy prices normalise: If tensions in the Middle East ease and oil and gas prices stabilise, the macro environment could look materially less fragile. This would reduce one of the key drivers of 
our expectation for wider spreads.

• AI disruption proves more manageable than feared: A steadier, more complementary adoption of AI – supporting productivity rather than displacing existing business models – would help underpin earnings and keep default expectations low. A benign AI narrative would reduce one of the main sources of market volatility.

• Private credit stress remains contained: If challenges in private credit and leveraged loans stay isolated – without meaningful contagion into public high 
yield – it could reinforce demand for liquid HY markets, potentially positioning the asset class as a relative safe haven.

This article is an extract from our Q2 2026 Active Fixed Income Outlook.

Key risk

Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested.