Credit Opportunities: Outlook 2026
December 2025 | Romain Miginiac
An important question for clients next year will be identifying the sweet spot in fixed income, in a world of Federal Reserve (Fed) rate cuts but high uncertainty.
We think this sweet spot is in subordinated debt, an asset class that is likely to benefit from the hunt for yield as the Fed cuts rates and inflows continue to fuel demand for high income credit. The asset class offers up to 2% pick-up in spread/yield compared to investment grade (IG) bonds, from “A” rated issuers (on average). Nevertheless, in an uncertain environment with tight valuations in fixed income, an active approach is paramount to navigate potential volatility.
The key lesson from 2025 is that bond investing is all about risk management. While performance in bond markets has been strong year-to-date (at the time of writing), markets saw material volatility in April 2025 – reflecting both high macro uncertainty and tight valuations. Our disciplined approach to actively manage our allocation across the capital structure helped lead to a materially lower drawdown compared to AT1 CoCos, as we entered the April sell-off with a highly defensive portfolio. We were also able to take advantage of the sell-off by adding to additional tier 1 (AT1) contingent convertible bonds (CoCos) that underperformed. AT1 CoCos were down more than 4% in early April, while Tier 2s and seniors were down only 0-1%.
We see the European financial sector as one of the best opportunities within credit markets in 2026.
Looking ahead to 2026, while history does not repeat itself, it often rhymes. In the current context of spreads on AT1 CoCos close to their all-time tightest levels and close to 0% of AT1s priced to perpetuity, we favour a more defensive approach – focusing on senior and Tier 2 bonds versus AT1 CoCos. As credit markets are cyclical, this approach should allow us to mitigate the potential drawdown when the upside is limited, but also to take advantage of volatility to add to AT1 CoCos to capture the recovery.
We see the European financial sector as one of the best opportunities within credit markets in 2026. The fundamentals of the sector are rock solid, with more than EUR 500 billion of excess capital buffers and close to EUR 250 billion of annual earnings buffer to protect bondholders. Bank stocks are up 65% year-to-date and more than 400% over the past five years, reflecting the quality of the sector and strong earnings tailwind from higher rates. In the context of macro and geopolitical uncertainty, we think the sector offers a good hiding place, for example with no direct impact from tariffs. In our view, the sector could absorb any potential scenario just through earnings, without impairing excess capital.
Romain Miginiac is a Portfolio Manager at Atlanticomnium, who co-manages Credit Opportunities and Sustainable Climate Bond strategies for GAM Investments.
1Source: Atlanticomnium and Bloomberg, April 2025.