Stuart Chilvers, Rathbone Ethical Bond Fund Manager, talks causes for optimism and what’s on the fund’s watchlist for 2026.
We’re at that time of year once again where we are naturally inclined to make resolutions and think about what the year ahead could hold. The former is easy enough for me: more running now my daughter is sleeping marginally better (inevitably even voicing that thought will now send the current improvement into reverse!). On the latter, the quiet-ish week or so between Christmas and New Year left plenty of time to think about what 2026 could hold for corporate bond markets. Obviously, an “unknown unknown” could rapidly derail current expectations, but, with what we know today, I see a few key reasons for both optimism and caution.
Breaking with the stereotype that bond managers always focus on the negative, let’s start with the causes for optimism! First and foremost, starting yields are still at an attractive level. Taking the ICE BofA Sterling Corporate index for instance, the yield to worst starts 2026 at the 59th percentile looking back over the past 20 years, and the 68th percentile over the last 10 years. Coming into the year with a yield to worst over 5% is a strong starting point for sterling investment grade corporate bond markets, and provides a decent buffer for absolute performance this year if credit spreads were to widen. That’s helpful given the tight starting level of credit spreads.
This takes us neatly on to our second positive: we expect gilt yields to move lower over the year. There’s likely to be some politically-driven volatility. There was probably enough in the Budget to make the Spring Statement a genuine non-event for gilts, but the local elections in May could be a different story.
Nevertheless, we think the weak employment picture will persuade the Bank of England to cut by more than the 1.75 times priced in at the time of writing (we see scope for three 0.25% cuts, which would take the base rate down to 3%).
We also think last year’s (welcome) action to cut supply at the long-end of the gilts market could drive long-dated gilt yields lower as well. Given the mechanical linkage between UK investment grade corporate bonds’ yields and those of gilts (the former trade at a spread to the latter), lower gilt yields would result in the capital appreciation of corporate bond prices, all else being equal.
AI is fuelling a surge in tech debt issuance
So on to two potential negatives – both of which came into focus late in 2025. First up, we have concerns about the sheer volume of issuance expected from the so-called AI hyperscalers and other firms to fund their enormous AI-related capex plans. To be clear, we are not generally worried at the issuer level given the huge capacity most of these firms have to service their debt given their low leverage and strong profitability. But we do think the overall increase in supply could weigh on credit spreads more generally. For bonds linked to specific AI projects/data centres without wider recourse, the devil will be in the detail of each deal. Investors will need to ensure they are aware of, and comfortable with, the risks they are taking.
The other main concern at the forefront of our minds is the private credit industry. We are on the look-out for any further signs of trouble brewing following a few decent sized defaults on private credit loans in the US at the back-end of last year (admittedly, it appears likely that fraudulent activity was involved, which does not suggest these were down to more systemic risks). By its very nature, private credit is opaque, but if we were to see defaults in the space pick up, we wouldn’t be surprised if that unnerved investors a bit and drove credit spreads wider.
So how does this leave us feeling for 2026?
Cautiously optimistic. We think that the starting level of yields mean that investment grade credit can enjoy another decent year. But, as ever, we’re convinced it will pay to be active in credit selection to avoid the potential risks that we think could be brewing.
Main image: diego-ph-vTitvl4O2kE-unsplash
