Following strong performance in 2025, the BNP Paribas Asset Management global absolute return bond strategy is set to benefit from further market developments in 2026
Market volatility in recent years has enhanced the value of absolute return bond strategies to investors. Such strategies seek to deliver a positive, stable return across the cycle with a strong focus on capital preservation. And this capital preservation appeals to investors, given that the path of interest rates and inflation remain unknown.
Demand for global unconstrained fixed income products is also healthy. Valuations in areas such as corporate credit are tight, and cash rates in Europe remain low. This makes investing in a broad, flexible product all the more attractive.
Positioning changes drove performance in 2025
BNP Paribas Asset Management’s global absolute return bond strategy delivered strong total and relative returns during 2025. Returns were significantly ahead of our goal of an annual return of 2.5% above cash across all market environments.1
Over the year, we made changes to the portfolio’s positioning to take advantage of developments in global markets. For example, at the start of the fourth quarter 2025, we adopted a flat duration stance consisting of short positions in markets, such as Japan, versus a long to countries, such as the UK.
This was subsequently amended to a small, long-duration bias. We favoured markets where we believed the likelihood of interest rate cuts had been underpriced. This included the UK and New Zealand, where we took the view that rate hikes were being priced in prematurely.
In terms of interest rate allocations, we ended 2025 with higher levels of exposure to relative value strategies, where we see a better balance of reward to risk. This included a long position to Norway relative to Sweden.
Overall, however, the strategy’s positioning became increasingly defensive over the year. This shift was achieved through a combination of selling positions that had performed particularly well as our investment thesis played out, alongside a reduction of more market-sensitive exposures.
Portfolio activity declined towards the end of 2025. In part, this was a result of the reduction in volatility caused by the lengthy US government shutdown in October and November.
Seeking opportunities in 2026
While fixed income investing as a whole has become more attractive now that yields have risen from their ultra-low levels of five years ago, the outlook is far from clear. As we move into 2026, a flexible, diversified, and dynamic investment approach to bond investing will be key.
While markets can always be turbulent, volatility brings with it opportunities – and right now, we are seeing investment potential across global bond markets.
We expect to maintain a long duration bias for the initial months of 2026, especially in markets where we expect several interest rate cuts, such as the UK and Brazil.
Our forecast for the US is for the Federal Reserve to make multiple cuts to protect the American jobs market in the face of weaker economic growth. This should help the yield curve to steepen, driving a higher global term premium.
Our freedom to invest in the widest possible range of fixed income securities gives us considerable flexibility to position portfolios to benefit from steeper yield curves. This is another example of the advantages of being able to take both overweight and underweight positions in fixed income assets.
In Japan, our strategy of taking a long yen position versus currencies, such as the US dollar, is based on our belief that the Bank of Japan will tighten monetary policy further this year. We see the currency having a much more attractive risk-reward profile than interest rates themselves.
At the same time, the short to the US dollar reflects our view that US exceptionalism remains overpriced in risk assets. With the prospect of slowing growth, ongoing softening in the labour market and a potential change to the Federal Reserve chair in the near future, the US dollar appears likely to weaken further in 2026.
However, we intend to maintain the strategy’s long structural allocation to US mortgage-backed securities, given the positive carry the asset class can provide and the sector’s strong technical characteristics.
A flexible, global approach
Looking at corporate credit, we begin 2026 with a short position – but should spreads widen, we will seek to take advantage of select opportunities on a case-by-case basis.
While economic uncertainty continues to cloud the fixed income market outlook, our fundamental view is that investors who choose to pursue traditional, less flexible strategies could face significant risks.
The higher volatility of recent years has served only to widen the gap between the best and worst performing areas of the fixed income universe. In today’s shifting and uncertain economic landscape, we believe that a flexible, global approach is more important than ever.
[1] Source: BNP Paribas Asset Management, January 2026
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