Explaining 2025 and preparing to take advantage of the markets in 2026 (II)

After analyzing the   stock  markets a week ago, it is worth delving deeper into fixed income,  which is usually the  core  of many portfolios (depending on each investor’s risk aversion), a subject that is always complex and especially in years like the current one with much lower short-term interest rates than twelve months ago.

Fixed income in 2025

As happened in the stock markets, 2025 was  also a year of contrasts  in this type of asset, especially if we distinguish by geographical areas.

The yield on  US government debt  ended up falling (its price, always inversely, rising): the US Treasury bond index rose 6% in USD and 4% if the currency was hedged.

Conversely, in Europe, the highest quality public debt, that is,  German sovereign bonds , saw their yields rise and their prices fall sharply, weighed down, above all, by the announcement of the German fiscal spending plan.

French debt ,  meanwhile, also performed poorly, with its risk premium soaring due to political tensions within the government and stalled budget adjustments. Overall,  Eurozone debt is projected to gain only a few tenths  of a percent in yield by 2025.

The behavior of  private fixed income has been very different  thanks to the  compression of credit spreads , which is more intense the lower the quality of the issuer, with total returns of just over 2.5% on average in good quality bonds and around 6-7% in high yield bonds  (  similar behavior in the US).

At the top of the podium for global fixed income returns are  emerging market bonds   , which have had a good year and could repeat that performance in the current year.

Forecasts

As we approach the start of  2026 , fixed income is positioned very differently than it was a year ago. Given the declines in central bank intervention rates in the West, it is advisable  to underweight very short-term investments.  Only in maturities of  1-2 years  will it be possible to obtain favorable returns  , focusing, of course, on  short-term global high yield bonds .

Without high returns, sovereign bonds  from developed countries  should perform well in terms of price, provided there are no inflationary surprises. Extending the average maturity of positions in these bonds now seems advisable to achieve a higher yield and, potentially, higher coupons. In Europe, the preferred issuers are  France, Spain, and Italy  , which, by taking advantage of opportunities to buy during yield curve upturns, can be a great source of stability for portfolios.

The most important recommendation regarding sovereign bonds is to  overweight emerging market fixed income , both in local currency and in dollars, and this also applies to corporate bonds from those regions. As I mentioned a week ago, I believe that 2026  will likely be  the year of emerging markets  , both in bonds and equities: factors such as the current stability of their currencies, lower debt burdens, low inflation, and differential growth supported by falling interest rates should facilitate this.

In Europe and the US, we will have to be careful with private bonds due to the aforementioned strong compression of spreads that we have experienced in the last year, which leaves them with less capacity for appreciation. This means that, in addition to what has already been said about sovereign bonds,  covered bonds  and ABS, both of high quality , are the preferred types of fixed income for 2026.

Gold and the Dollar

Finally, gold and the  dollar  deserve special mention. Gold has seen a  65% increase in value  by 2025, a trend that, although less pronounced, could continue into the current year. The dollar, which  has fallen more than 13%  against the euro, has been the biggest loser, continuing the downward trend of the previous year due to expectations of interest rate cuts by the Federal Reserve, which were ultimately confirmed, and concerns about US public finances.

Optimism with moderation

After a positive but uneven 2025 across various asset classes and subclasses, I believe 2026 will likely be a less favorable year for the markets.  Corporate profits and inflationary surprises  will determine the performance of stock markets and fixed income.

As a fellow investment fund manager reminded me a few days ago, the  significant disparity  in the performance of sectors and stocks, along with the depreciation of the USD, have made 2025 far more challenging for the markets than the strong performance of the indices suggests. This year, however, with a more measured approach, presents itself as  highly promising  for investors.

P.S. On geopolitics at the start of the year : However much he may be accused of being an imperialist sheriff and violating international law, I feel compelled to acknowledge the  US military ‘s actions  , spearheaded by President Trump, in capturing Maduro. This action excites people of good will and, at the same time, highlights the need for someone—a leader, a country, an organization—to take the lead in the pursuit of global justice. Sending in the Marines is probably not the ideal solution, but Europe’s apathy and incapacity in foreign policy (Ukraine being the latest example), the ineffectiveness of the UN, and the constant threat in many areas emanating from Russia, China, and the ever-present threat of radical Islam, underscore the value of this type of action. In purely social and financial terms, a regime change in Venezuela would bring stability to the region, especially Colombia, and benefits to Spanish companies with a presence in Latin American countries (Mapfre, BBVA, etc.).