In a world where economic uncertainty and unpredictable inflation mean visibility on central bank policies is poor, investors are searching for strategies that can deliver consistent returns while protecting capital. Enter the global absolute return bond strategy – a flexible, dynamic investment approach that’s suited to the current environment.
Here’s why this strategy stands out as adapted to the environment facing investors in 2026.
The essence of absolute return bonds
Absolute return bond strategies are designed to deliver positive, stable returns across market cycles, with an emphasis on capital preservation.
Unlike traditional fixed income products, which are often constrained by benchmarks or regional allocations, an absolute return bond strategy has the freedom to invest across the global spectrum of fixed income assets. This flexibility allows the portfolio managers to exploit opportunities wherever they arise and to avoid areas where risk outweighs the potential reward.
Attractive risk-reward profile
Global absolute return bond strategies offer a compelling risk-reward proposition compared to more traditional fixed income sectors.
Our strategy seeks to deliver returns above cash – typically targeting 2.5% per annum gross of fees – while limiting rolling 12-month drawdowns to no more than -2.5%. This disciplined approach to risk management is especially important in today’s environment where the outlook for inflation, growth, and central bank reaction functions remains highly uncertain.
Capital preservation: A core principle
Capital preservation is at the heart of the absolute return bond strategy.
In times of market stress or heightened volatility, this bias toward protecting client assets becomes even more valuable. Investors need strategies that can weather all environments.
Our absolute return bond strategy is engineered to do just that, aiming for positive returns regardless of market direction.
Dynamic duration management
One of the standout features of this global absolute return bond strategy is its dynamic duration1 range, which spans from -4 to +4 years. This flexibility endows the strategy with the potential to perform not only when interest rates fall, but also when they rise – by positioning the portfolio with an underweight bias to interest rate risk.
For example, last autumn, our strategy maintained a neutral exposure to interest rate risk, balancing underweight positions in Japanese and US bonds and an overweight in UK sovereign debt. More recently, the team has shifted to a large overweight in interest rate risk in markets such as New Zealand, where interest rate hikes are, in our view, being priced in prematurely, or the UK where we see the potential for looser monetary policy as underpriced.
Relative value rather than a directional bias
Within the interest rate allocation, the strategy’s managers currently favour relative value trades such as the overweight in New Zealand bonds versus Canada. This reflects a belief that attractive risk-reward opportunities exist in relative value strategies in the current environment.
Overall, the portfolio is defensively positioned, with risk actively reduced coming into the New Year by monetising successful positions, trimming market-sensitive exposures and maintaining an overweight duration bias.
Navigating volatility and looking ahead
Volatility in the major bond markets was subdued at the end of 2025, partly due to the US government shutdown in October and November. We expect volatility to pick up in the first quarter of 2026, which should create investment opportunities.
Anticipating further rate cuts in markets such as the UK and Brazil, the strategy is likely to maintain an overweight bias to interest rate risk in the first half of 2026. In the US, we expect the Fed to cut rates several times later in 2026 to support the labour market and growth, which should help steepen the yield curve – a key theme we are playing currently.
Tactical currency and credit positions
In Japan, the outlook is for more rate hikes from the Bank of Japan. We are expressing this view through overweight positions in the yen versus the US dollar. We believe the yen offers superior risk-reward compared to interest rate markets, and we expect the US dollar to weaken in line with the US administration’s objective.
Outside sovereign debt markets, US agency mortgage-backed securities remain a favoured allocation, offering positive carry and supportive technicals.
In corporate credit, we maintain an underweight stance, but stand ready to go long if risk premia rise, selectively targeting opportunities based on fundamentals and valuations.
Why absolute return bonds make sense in 2026
We believe our global absolute return bond strategy offers a compelling solution for investors seeking stable returns, capital preservation, and flexibility in a world of uncertainty.
With the ability to exploit opportunities across global fixed income markets, this strategy is well-equipped to navigate whatever 2026 may bring. For those looking to safeguard their portfolios while capturing the opportunities in global bond markets, absolute return bonds have a lot to offer investors in the coming year.
[1] Unlike fixed-duration strategies, this approach aims to maximise returns by lengthening duration when interest rates are expected to fall and shortening it when rates rise.
