Winds of Change 2026: Managing opportunities

Franklin Templeton Institute’s latest Winds of Change paper reveals how profound shifts in monetary and fiscal policy are reshaping fixed income markets, uncovering opportunities and demanding a more diversified strategy.

Key takeaways:

• Monetary easing, stable growth and rising term premia will likely underpin a steepening of yield curves. As cash rates fall, we believe investors will turn to opportunities in corporate credit and emerging market debt (EMD).
• In our opinion, longer-term government bonds in developed markets should underperform given large budget deficits and strong borrowing demand for capital expenditures.
• We think the winds of change in fixed income demand more diversified portfolio construction.
   

Fixed income: The importance of policy

In our Winds of Change papers, we address questions that are top-of-mind for investors. The most important today, in our view, are how investors should position for changes in monetary and fiscal policy. In what follows, we offer insights leveraging our structured framework for assessing the policy environment.

Central banks remain pivotal actors, and via their actions should impact returns across all fixed income markets. But increasingly fiscal policy is gaining importance and may play a key role in the direction of term premiums and the shape of yield curves.

Investment conclusions

Policy change is significant. An era of big government also means one of large deficits and debt levels, at least in developed countries. Monetary policy, above all in the United States, must also navigate conflicting objectives of growth and inflation.

On one level, those changes pose significant challenges for fixed income investors. But a proper dissection of the underlying trends points to an opportunity that steepening yield curves and a weak US dollar present to broaden investment holdings in the areas of corporate credit and EMD. In our opinion, the advantage of doing so is not merely the potential for higher risk-adjusted returns, but also for greater portfolio diversification.

Winds are clearly pointing toward change. But also, toward opportunity.