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Many investors have focused closely on the equities portion of their portfolios during the past year, driven by exuberance over artificial intelligence. In turn, fixed income has taken a back seat, even during an arguably equally seismic shift in the bond market.
“Bonds today are less about central bank interest rate directions. A growing focus now is on government fiscal deficits and massive bond issuances,” says Sam Acton, co-head of fixed income at PICTON Investments, a Toronto-based asset-management firm known for its actively managed, alternative fixed income funds.
For advisors, the greatest risks in 2026 may be complacency and assuming that traditional fixed income will behave as it has in past cycles. That makes it critical to manage risks proactively, manage duration deliberately, and focus on credit quality to build more resilient fixed-income allocations.
As governments spend more and, as a result, issue more bonds, investors are increasingly seeking higher yields as compensation for the growing risks associated with expanded balance sheets.
“In turn, you’re seeing yields rise for longer-duration fixed income around the world and a steepening of yield curves,” Mr. Acton says.
It’s not just public debt worrying investors.
“On the corporate side, it’s a similar story around a massive surge in new debt,” he adds. “The big names such as Microsoft Corp., Alphabet Inc., Meta Platforms Inc., Amazon.com Inc. and Oracle Corp. have already issued $100-billion of bonds.”
He says the market expects potentially another $500-billion could be issued in 2026.
“That massive growth is likely enough to pressure credit spreads wider across the entire investment-grade and high-yield market.”
These are new headwinds for bond portfolios, adding to other ongoing risks such as persistent, high-than-desired inflation and credit spreads close to their tightest in recent history. All these factors can make investors nervous, especially those holding traditional fixed-income index exposures. Meanwhile, the tailwinds for indexing are waning.
“At the front end of the yield curve, the cutting cycle is mostly done,” Mr. Acton says.
Sam Acton, co-head of fixed income at PICTON Investments.Supplied
He notes the Bank of Canada is on hold for its overnight rate, although the U.S. Federal Reserve is expected to cut interest rates two more times this year.
Even with somewhat fair conditions ahead for short-term fixed income, Mr. Acton says that “the risk of 10-year yields drifting is significant.”
As well, central banks of developed economies are on increasingly divergent paths. For example, unlike the U.S., the Bank of Japan is forecast to increase its policy rate. What’s more, the fiscal picture of developed economies is uncertain, at best. Most are borrowing massive sums to stimulate growth. Even if successful, the result could be higher inflation.
The risks of rising yields and falling bond values loom over a fixed-income market that, on the surface, has been calmer than it truly is, Mr. Acton says. “Dig down and you find pockets of weakness.”
He points to CCC-rated bonds underperforming in the final part of 2025, and private credit’s recent struggles with funds facing higher redemptions and gating investor withdrawals.
PICTON Investments’ overall fixed-income strategy is to hold shorter-duration bonds (two- to five-years), which may benefit from further interest rate cuts and could be less sensitive to a steepening yield curve. Not all investment-grade issues are the same today, making fundamental research increasingly important.
“You really need an expanded toolset to navigate risks today,” Mr. Acton says. “At PICTON Investments we use options to hedge risk – a much different approach than what you get with an passive index fund or even most active managers.”
Tactical shorting strategies is another tool alternative strategies use, seeking to help investors grind out returns when the market turns sour. Mr. Acton says hedging and shorting, paired with a long strategy, can add value in risk-off environments such as the spring of 2025.
“Our fixed-income strategies have realized positive returns during the ‘Liberation Day’ volatility in April 2025,” he notes.
Active management, paired with the suite of strategies offered by alternative fixed income, can be a powerful combination. It can help find opportunities among the diverging monetary paths of different economies, as well as on the corporate debt side, Mr. Acton adds.
Broadly, he says advisors should be more thoughtful about bond construction in portfolios, recognizing the long-running negative correlation between stocks and bonds may no longer work, as 2022 demonstrated.
Leveraging third-party expertise such as PICTON Investments’ can help advisors navigate these risks and find potential opportunities across market environments, Mr. Acton says.
“When interest rates are coming down and spreads tighten, a passive strategy may work just fine. But amid volatile and challenging times like today, an alternative fixed income strategy that can hedge, short and provide differentiated returns is likely to add value for investors.”
Learn more about PICTON Investments.
Advertising feature produced by Globe Content Studio with PICTON Investments. The Globe’s editorial department was not involved.