2026 Fixed Income Cup: Part II

As the tournament moves into the knockout round, the field narrows and the stakes rise. Part I focused on the first-half matchups. In Part II, we turn to the themes most likely to decide the second half of 2026.

Two defining questions are increasingly shaping market outcomes: can AI investment justify the scale of expectations embedded across markets and the economy, and can growth remain resilient in a world where inflation and policy rates stay elevated for longer than anticipated?

AI: Running Away with the Match or Running Ahead of Itself?

• AI has become a major driver of capital spending, market performance, and consumer wealth.
• Supporters believe AI can unlock meaningful productivity gains which can enhance growth, labor efficiency, and profitability.
• The risk is that investment enthusiasm continues to outpace the realization of durable economic returns.
• While the investment cycle remains in its early stages, much of the broader macroeconomic payoff remains forward-looking rather than fully realized.
• Second-half question: Can AI-driven investment translate into economic benefits quickly enough to justify the scale of spending?

Higher-for-Longer: Can Resilience Survive Restrictive Conditions?

• Markets entered 2026 expecting a more accommodative Federal Reserve, but solid growth and uneven inflation progress forced investors to reassess the path of policy easing.
• Several inflation pressures now appear more structural than temporary, including AI-related infrastructure demand, elevated energy prices, higher electricity demand, and fiscal expansion.
• At the same time, restrictive policy is placing greater pressure on more rate-sensitive parts of the economy, even as headline growth remains firm.
• Second-half question: Can economic momentum continue to withstand a prolonged higher-for-longer environment?

2H 2026 Fixed Income Playbook

Despite the ongoing matchups and unanswered questions across the market, fundamental and technical drivers remain supportive of current spread levels.

Current valuations leave less margin for error, but absent a material macro shock, policy misstep, or liquidity event, it is difficult to identify what would push spreads meaningfully wider.

As a result, we believe investors should focus on the following playbook – built on portfolio resilience, liquidity, and selective risk-taking – to navigate an increasingly uncertain second half:

At IR+M, periods like this reinforce the importance of remaining grounded in fundamentals. Headlines and sentiment can shift quickly, particularly in markets defined by competing outcomes and elevated uncertainty. Rather than attempting to predict every short-term swing, our focus remains on consistency, disciplined credit work, and flexibility as conditions evolve.

In these environments, incremental risk-taking tends to provide only modest benefits, whereas maintaining ample liquidity preserves the ability to act when conditions shift. Markets rarely move in a straight line, and the second half of 2026 is unlikely to be an exception. As the tournament enters the knockout round, avoiding uncompensated risk may matter more than trying to call a single winner too early.

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Source: Bloomberg as of 6/9/26.

The views contained in this report are those of Income Research + Management (“IR+M”) and are based on information obtained by IR+M from sources that are believed to be reliable but IR+M makes no guarantee as to the accuracy or completeness of the underlying third-party data used to form IR+M’s views and opinions. This report is for informational purposes only and is not intended to provide specific advice, recommendations, or projected returns for any particular IR+M product. Investing in securities involves risk of loss that clients should be prepared to bear. More specifically, investing in the bond market is subject to certain risks including but not limited to market, interest rate, credit, call or prepayment, extension, issuer, and inflation risk. This material may not be reproduced in any form or referred to in any other publication without express written permission from IR+M.

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