At the start of 2026, we continue to see a range of opportunities offering attractive value across certain focused parts of the corporate bond market. While headline commentary often focuses on credit spreads being at their tightest levels in years, this refers only to conditions at the index level.
In practice, the fixed income market is more nuanced and diverse, spanning multiple sectors, regions, and capital structures, often with individual issuers offering numerous bonds across currencies and maturities. We believe this breadth creates a varied environment where bottom-up analysis remains essential and is key for uncovering meaningful value.
Against this backdrop, our Head of Fixed Income, Alex Perowne, outlines five sectors we see as having notable value in the current environment.
After several challenging years, we believe the recovery in large-cap banks is often underappreciated. Many have rebuilt capital strength, tightened cost control and delivered robust profitability.
Santander’s FY2025 results illustrate this trend with record annual profitability of EUR 14.1bn, return on tangible equity of 16.3% and cost-income ratio of 41.2% (1), signalling strong operational discipline.
Given this backdrop, we think yields in the region of 6.50–7% for large-cap banks’ junior bonds still represent good value.
A segment of older, often crisis-era bonds issued by financial institutions remains in circulation today. These instruments were originally created to strengthen balance sheets during periods of stress and continue to offer distinct features within the market.
These legacy bonds can provide two potential sources of return: one on an attractive ongoing income (carry) and two, on the possibility of capital gain if the issuer chooses to retire or buy back the bonds as part of balance sheet cleanup.
In addition, we believe the market sometimes underprices the probability of banks calling their bonds at the first call date. Recently, we have identified bonds where the yield-to-call appears particularly appealing relative to the issuer’s fundamentals and call incentives.
M&A activity across insurers, specialist financials and mid‑cap banks has been steadily increasing, driven by consolidation, scale benefits and strong capital positions among larger institutions.
Recent transactions, such as Ageas acquiring Esure (UK home and car insurer) and Zurich agreeing in principle to acquire Beazley (a specialist insurer focused on cyber), reflect this momentum. We expect this consolidation trend to continue, with implications for credit profiles depending on the size and rating of the acquiring entity.
This activity has also extended into mid‑cap banking. The acquisition of Virgin Money by Nationwide in 2025 highlights the strategic interest of larger players seeking to deploy excess capital and broaden market presence. We see further consolidation potential in the European mid‑cap space, given competitive dynamics and elevated capital levels.
Energy remains, in our view, one of the most disliked and undervalued sectors within credit markets.
The sector has survived unprecedented stress, including the extreme demand destruction during COVID19, to then rebuilding their balance sheets during a period of higher prices caused by Russian invasion of Ukraine. Now with oil prices lower again, they are making money but very much focused on cost control and selling non-core assets.
Notably, we see many issuers operating with leverage below 1x net debt / EBITDA, demonstrating balance sheet strength. Yet yields of 7–10% remain common, reflecting ongoing scepticism around cyclical and commodity related risks.
The asset backed nature of the sector provides financing flexibility and energy can also offer inflation protection, should inflation turn back up (not our base case but a good portfolio diversifier). Overall, we see this combination of resilience, balance-sheet strength and yield as attractive attributes.
We continue to see improving fundamentals among producers of gold and industrial metals, supported by a mix of tight supply and sustained demand for underlying commodities.
Many companies in the sector maintain low leverage, with improving EBITDA and stronger cash generation contributing to strong credit metrics. As a result, the sector remains a source of diversification, particularly given its distinct economic drivers relative to broader credit markets.
In our view, the fixed income market in 2026 rewards a selective, bottom‑up approach. Opportunities vary widely across sectors, issuers and structures, and broad index‑level measures can mask meaningful dispersion.
The sectors highlighted above illustrate areas where fundamentals, valuations, consolidation trends and balance-sheet dynamics are shaping distinctive market characteristics. As dispersion persists, we believe rigorous credit analysis remains essential for navigating today’s environment.
If you’d like to explore how our fixed income opportunities could support your portfolio, we’re available at info@bedrockgroup.com.
References:
(1)https://www.santander.com/en/press-room/press-releases/2026/02/2025-santander-bank-earnings
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