The macro backdrop for bonds remains constructive—in our view, yields are attractive in real terms—but navigating H2 2026 requires careful attention to duration risk, fiscal dynamics, and idiosyncratic credit risk. The balance of 2026 remains an income story more than a capital gain trade
1. A hawkish Fed and a flatter curve
An acceleration in inflation and a newly hawkish Fed has led to a significant flattening of the Treasury curve. With the Fed increasingly likely to raise rates, some additional curve flattening may lie ahead, but we do not expect inversion as recession risks remain muted. In addition, longer-term yields should remain above 4% on a combination of deficit concerns and expectations that strong productivity growth can lift trend growth. The practical implication: we believe intermediate maturities (5–7 year) may offer the best risk-adjusted value, especially as monetary tightening is now close to fully discounted, while going too far out on the curve carries meaningful term premium risk.
2. Credit spreads leave little margin for error
After years of spread compression, investment-grade credit valuations offer very little cushion. With credit spreads approaching historical lows1, corporate bonds offer limited compensation for the additional risk — and as capital-intensive AI projects proliferate, the potential for credit stress, especially among lower-rated issuers, rises. High-quality government bonds are once again able to play their traditional role as a portfolio stabilizer — if markets become choppy or growth disappoints, we believe they can help provide valuable risk mitigation. Our implication for the rest of 2026: favor quality over yield-chasing, be selective in credit, and use volatility spikes as entry points rather than reasons to extend risk indiscriminately.
3. Caution in CMBS conduits, opportunities in SASB
CMBS is one of the most bifurcated corners of fixed income in 2026. Office and data centers will keep driving single-asset/single-borrower (SASB) issuance, though weak office demand may push conduit delinquencies higher — and rising leverage will increase risk in large CMBS and CRE CLO deals unless credit protections improve. On the constructive side, the CMBS market achieved post-GFC record issuance in 2025 on improved liquidity and sentiment, with property valuations finally stabilizing after a three-year slide2. Meanwhile, a new growth engine is emerging: data centers have become a core property type within US SASB CMBS, and financing demand for data centers will likely rise as AI infrastructure buildout accelerates. The playbook for H2 2026: we believe investors should favor senior tranches and trophy assets while maintaining caution on office and retail exposures.
4. Carry is the story in leveraged credit, but caution is warranted
High yield bonds and leveraged loans are broadly offering positive returns in 20263, but the story is firmly one of income rather than spread compression. Investors are reasonably compensated for credit risk amid moderate default expectations, though valuations are fair overall rather than cheap. Default rates remain moderate but are diverging — high yield bond defaults are drifting down toward ~3.5%, while leveraged-loan defaults are climbing toward ~5.5%.4 The key risk is AI-driven disruption at the issuer level: markets have increasingly focused on the potentially negative impact of AI on a range of issuers, particularly those in the software and B2B services sectors, where loan and bond prices are coming under pressure as investors reassess business models for potential obsolescence. Our view: we like the carry offered in both bonds and loans and would size them to the rate path. Floating-rate loans offer attractive income while front-end rates stay elevated and sit senior in the capital structure; BB/B bonds lock in all-in yields and provide better convexity if the Fed eventually eases. In both, we stay up in quality — the rising loan default rate and the concentration of AI-exposed software and B2B issuers in the loan market reward issuer selection rather than reaching for spread. We approach spread tightening as an opportunity to reduce risk while we would view potential spread widening as an opportunity.
5. Emerging markets is still a bright spot, but country specific
We believe EM debt stands out as one of the more compelling opportunities in H2 2026, reinforced by more favorable public-sector debt dynamics compared with developed-market counterparts. Many emerging market central banks raised interest rates early in the cycle, and with inflation in several countries now falling, some local currency EM bonds offer high real yields.5 This is particularly true in Latin America with countries like Brazil and Chile. Asian net energy importers such as Indonesia and Thailand face headwinds from higher oil prices tied to the Middle East conflict.
1. Barclays
2. KBRA (Kroll Bond Rating Agency)
3. Morgan Stanley
4. Morgan Stanley
5. MacKay Shields
IMPORTANT DISCLOSURE
Availability of products and services provided by MacKay Shields may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only. It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. All investments contain risks and may lose value and these materials do not undertake to explain all of the risks associated with any investment strategy referred to herein. Clients and investors should not invest in any strategy referred to herein unless satisfied that they and/or their representatives have requested and received all information that would enable them to evaluate the merits and risks thereof. Any forward-looking statements speak only as of the date they are made, and MacKay Shields assumes no duty and does not undertake to update forward looking statements. Any opinions expressed are the views and opinions of certain investment professionals at MacKay Shields which are subject to change without notice. There may have been, and may in the future be, changes to the investment personnel responsible for the management of the strategy(ies) described herein, as well as changes to the investment process utilized by such investment personnel. Past performance is not indicative of future results.
Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met.
Past performance is not indicative of future results.
NOTE TO UK AND EUROPEAN UNION AUDIENCE
This document is intended only for the use of professional investors as defined in the Alternative Investment Fund Manager’s Directive and/or the UK Financial Conduct Authority’s Conduct of Business Sourcebook. To the extent this document has been issued in the United Kingdom, it has been issued by NYL Investments UK LLP, 200 Aldersgate Street, London UK EC1A 4HD, which is authorised and regulated by the UK Financial Conduct Authority. To the extent this document has been issued in the EEA, it has been issued by NYL Investments Europe Limited, 77 Sir John Rogerson's Quay, Block C Dublin D02 VK60 Ireland. NYL Investments Europe Limited is authorized and regulated by the Central Bank of Ireland (i) to act as an alternative investment fund manager of alternative investment funds under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) and (ii) to provide the services of individual portfolio management, investment advice and the receipt and transmission of orders as defined in Regulation 7(4) of the AIFMD Regulations to persons who meet the definition of “professional client” as set out in the MiFID Regulations. It has passported its license in additional countries in the EEA.
This document only describes capabilities of certain affiliates of New York Life Investment Management and/or MacKay Shields LLC. No such affiliates will accept subscriptions in any funds not admitted to marketing in your country or provide services to potential customers in your country, including discretionary asset management services, except where it is licensed to do so or can rely on an applicable exemption.
MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. “New York Life Investment Management” is the brand name and service mark used to represent a group of affiliated investment advisors of New York Life Insurance Company, including New York Life Investment Management LLC, a registered investment advisor.
NOTE TO CANADIAN RECIPIENTS
The information in these materials is not an offer to sell securities or a solicitation of an offer to buy securities in any jurisdiction of Canada. In Canada, any offer or sale of securities or the provision of any advisory or investment fund manager services will be made only in accordance with applicable Canadian securities laws. More specifically, any offer or sale of securities will be made in accordance with applicable exemptions to dealer and investment fund manager registration requirements, as well as under an exemption from the requirement to file a prospectus, and any advice given on securities will be made in reliance on applicable exemptions to adviser registration requirements.
Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met. Past performance is not indicative of future results.
NOTE TO JAPANESE RECIPIENTS
In Japan, this is issued by New York Life Investment Management Asia Limited (Financial Instruments Business Operator, Kanto Local Finance Bureau (FIBO) No. 2964, Member of the Investment Management Association of Japan and the Type 2 Financial Instruments Firms Association) for institutional investors only. As costs and/or fees to be borne by investors vary depending on circumstances such as products, services, investment period and market conditions, the total amount nor the calculation methods cannot be disclosed in advance. All investments involve risks, including market fluctuation and investors may lose the principal amount invested. Investors should obtain and read the prospectus and/or information set forth in Article 37-3 of the Financial Instruments and Exchange Act carefully before making investment decisions.
MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. “New York Life Investment Management” is the brand name and service mark used to represent a group of affiliated investment advisors of New York Life Insurance Company, including New York Life Investment Management LLC, a registered investment advisor.
SOURCE INFORMATION
“Bloomberg®”, “Bloomberg Indices®”, Bloomberg Fixed Income Indices, Bloomberg Equity Indices and all other Bloomberg indices referenced herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by MacKay Shields LLC (“MacKay Shields”). Bloomberg is not affiliated with MacKay Shields, and Bloomberg does not approve, endorse, review, or recommend MacKay Shields or any products, funds or services described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to MacKay Shields or any products, funds or services described herein.
Subscribe to get MacKay Shields insights delivered to your inbox.
Related Thought Leadership