Anders Persson, Head of Fixed Income at Nuveen, outlines a global economy entering a new regime of fiscal dominance and structural dispersion. As growth moderates and valuations remain elevated, long-term forces are reshaping risks and opportunities, calling for disciplined, diversified fixed income strategies beyond traditional credit.
We are entering a period of profound structural transformation in the global economy, where traditional policy frameworks are giving way to new drivers of growth and volatility. Economic growth has slowed in many countries, and we expect further moderation ahead, although in the U.S. we are likely to avoid a recession. As we look ahead, we believe the interaction of long-term forces such as fiscal policy, tariffs, demographics, immigration, and technological disruption will shape investment themes and opportunities across markets.
- Elevated fiscal deficits remain historically large across major economies, with debt-to-gross domestic product (GDP) ratios projected to climb substantially. These expanding deficits are pushing up term premiums, contributing to increased volatility in longer-dated interest rates. Government spending is helping to stabilize employment and sustain demand, although progress on inflation in the U.S. has been slow, while the eurozone is on track toward its target.
- Trade policy has shifted toward more restrictive measures globally, creating volatility and presenting downside risks to growth, alongside upside inflation risks. Yet this evolution is accelerating supply chain diversification and regional manufacturing opportunities, creating advantages for domestic producers and nearshoring strategies. Longer term, broad tariffs can reduce trade volumes, raise input costs, and dampen productivity growth, which could lead to lower GDP and real wage growth.
- Demographics and immigration policy are fundamentally reshaping labor supply. Aging populations and constrained international immigration create shortages that elevate wage pressures, and over the next decade, slower labor force growth will likely result in weaker GDP growth. Innovation in automation and artificial intelligence (AI) investment are partially offsetting some of the weakness, with sustained demand in healthcare to meet the needs of older households and technology infrastructure.
- The AI productivity super cycle is emerging as a transformative productivity catalyst, shifting from hype to execution as companies accelerate spending on datacenter infrastructure, semiconductors, and automation. The IMF estimates about 60% of jobs in advanced economies are exposed to AI. Additionally, AI-related industries are now a core driver of goods trade, power demand and corporate margins. Productivity gains could meaningfully lift medium-term potential growth, helping sustain profits even as real rates remain elevated.
The global economy is entering an era of structural dispersion, where investors must navigate multiple policy regimes, requiring diligence. Across all major regions, fiscal policy — not monetary — now defines the macro cycle. By staying flexible and diversified, while maintaining a longer-term view, investors can identify opportunities to capitalize on the dispersion. We look forward to sharing our views of major markets and asset classes as the year unfolds.
Digging deeper for diversification: Look beyond traditional credit
For fixed income investors, the shift toward fiscal dominance argues for selectivity along the curve and across sovereign markets. Rather than extending duration aggressively, we see value in positioning for moderately steeper curves, an environment supportive of sectors with structural demand or lower sensitivity to sovereign supply dynamics. Securitized credit, municipal bonds, and high-quality credit remain well supported, while careful attention to sovereign issuance patterns and fiscal frameworks will be increasingly important.
Although we see opportunities to take risk and add income across fixed income market segments, we are also cognizant of rich valuations. This dynamic is not unique to fixed income markets. From equities to commodities to credit spreads, valuations are near historically high levels. Tight credit spreads on their own are not a compelling reason to reduce risk, and full valuations can persist for a long time before correcting. However, the current valuation landscape does argue for a nuanced approach to risk taking.
The best way to reconcile the positive economic outlook with potentially full valuations in the fixed income markets is to dig deeper. Investors have thoroughly picked over the conventional, liquid credit markets, and attractive opportunities are harder to find. Inflows into fixed income funds have been strong this year, totaling almost 7% of AUM for high grade funds through end-October, 4% for high yield funds, and 12% for broadly syndicated loan funds. With all these inflows chasing the same universe of opportunities, it is no surprise that spreads have tightened.
As a result, we see the best opportunities in areas where investors are being compensated to take liquidity risk rather than credit risk. Less-liquid segments of credit offer higher yields and potentially higher returns, to compensate for the risk of illiquidity. Given our constructive macroeconomic outlook and the full valuations across traditional credit markets, we think this is an attractive tradeoff in the current environment.
For a given credit rating, investors can significantly increase the income of their portfolio by adding relatively less-liquid credit. For example, in the single-A credit rating bucket, corporate debt offers spreads of around 67 bps. Areas of securitized products, which are less liquid, like collateralized loan obligations (CLO) or commercial mortgage backed securities (CMBS) have spreads of around 184 bps or 336 bps – for the same level of credit risk. Further down the ratings spectrum, the pickup can be even more attractive. For BB-rated credit, corporate bonds trade with spreads around 174 bps, compared with 248 bps for BB-rated emerging market sovereigns or above 650 bps for BB-rated CLOs.
Developed markets borrow from the emerging market playbook
A notable shift in the 2026 landscape will be the narrowing of the gap between developed markets (DM) and emerging markets (EM) in terms of macro stability, institutional credibility, and policy predictability. Questions that investors once reserved for emerging markets – around political continuity, central bank independence, and the durability of fiscal and institutional anchors – are increasingly relevant across major developed market economies.
Political transitions in France and Japan, alongside the change in Federal Reserve leadership when Chair Powell’s term ends in early 2026, introduce a degree of uncertainty at a time when global term premiums have already risen. Meanwhile, continued adjustments to global supply chains, elevated geopolitical tensions, and a more fragmented trade environment mean that DM economies face structural forces that look increasingly similar to the challenges traditionally associated with EM.
At the same time, many EM economies have strengthened their fundamentals. Earlier and more decisive monetary tightening, healthier balance sheets, and more credible policy frameworks mean EM assets are entering 2026 from a position of relative stability.
Discipline meets opportunity
In this environment, we believe the most effective approach is a combination of discipline and creativity: maintaining exposure to high-quality income, recognizing the growing relevance of fiscal dynamics and diversifying across sectors that offer attractive risk-adjusted returns, including securitized credit, municipals, infrastructure, and segments of EM debt. By combining a clear understanding of evolving policy regimes with thoughtful portfolio construction, investors can position effectively for a cycle that is more stable than feared, yet more nuanced than in the past.
