Five reasons why now could be the right time to revisit bonds

By Joss Murphy on 18 June 2026 in Fixed income

Bonds have an important role to play in most diversified portfolios – but is now the right time for investors to embrace the asset class?

Global debt markets have been pretty unstable in 2026, due to geopolitical unrest, rising energy prices, economic concerns and higher interest rates. But fixed income investors remain broadly optimistic. They believe there are plenty of opportunities, with strong demand for debt financing to fund business expansion.

Here are five reasons why fixed income could make sense in the second half of the year and some investment funds that are worth considering.

1) Attractive yields

According to Fidelity, bond yields are generally higher than they have been for much of the past two decades*. Higher starting yields can help provide a buffer against future volatility. This is because a bond’s higher coupon income can help offset modest price declines, allowing it to (hopefully) still deliver a positive total return, despite volatility. It’s also unclear whether interest rates will continue rising. Inflation concerns and high oil prices have kept them elevated, but there’s no guarantee that this will continue.

Rhys Davies, manager of Invesco Bond Income Plus, recently told us that his focus was on choosing bonds that offer sufficient yield to compensate for the risks being taken. “You can have higher bonds issued by very good quality companies that are rated as high yield where the chances of them actually defaulting are still relatively low,” he added. As well as having the backing of Invesco, this investment trust is well diversified across countries and industries, which has helped it maintain a consistently high dividend income level.

2) Healthy fundamentals

Corporate balance sheets remain relatively strong. This suggests companies are benefitting from decent cash flows and lower debt relative to earnings. Such a backdrop is good for bond investors, as it helps ensure that issuers can continue to meet their obligations with a lower risk of default. It also means outperformance will increasingly be driven by credit selection, according to the managers of Liontrust Sustainable Future Monthly Income Bond. They wrote:

The fund produces a monthly income, with some capital growth, by investing in corporate bonds and some government bonds. We also like the flexibility it has to move between shorter and longer-dated bonds to take advantage of interest rate changes.

3) Financing demands

The global debt universe is looking strong. Governments and corporations are expected to borrow $29 trillion from markets in 2026, according to the OECD. It believes two simultaneous developments are transforming the world economy: the exponential advance in artificial intelligence (AI) and increasing global economic and political uncertainty**. Similarly, Morgan Stanley forecasts AI-related global debt issuance to more than double to nearly $570 billion in 2026. It expects issuance to ramp up during the second half of the year***.

Tech giants, such as Amazon, plan to spend billions of dollars on AI over the coming months and this is one of the largest issuers in the M&G Optimal Income fund****. M&G is one of the biggest names in the UK bond space and this portfolio is its flagship offering, thanks to the flexible mandate enjoyed by lead manager Richard Woolnough. He’s one of only a few fixed income managers who can demonstrate the ability to add value through interest rate exposure management, asset allocation and stock selection.

4) Income without sacrifice

Generating an income is one of the main reasons for choosing bonds – but the sticking point has traditionally been the impact on longer-term growth. Investors craving additional revenue streams may find that prioritising income-generating assets can erode their longer-term purchasing power. However, multi-asset funds may provide a solution. For example, the Aegon Diversified Monthly Income fund targets 5% income and 1-2% growth.

In a recent interview, co-manager Vincent McEntegart, acknowledged that a reasonable allocation to both was a sensible approach. He said: “We felt investors would appreciate a fund that was able to give them an income and some capital growth. It then becomes about trying to find the sweet spot.” This is a truly diversified, multi-asset fund that has exposure to bonds, equities, property and alternatives. As a result, its managers can tap into a range of income sources.

5) Diversification

Diversification remains an important strategy. Having a spread of asset-class exposures is particularly prudent given the level of global uncertainty. One option is to buy a number of different fixed income funds, with some focusing on government bonds and others on corporate names. An alternative is opting for a fund that can invest across the fixed income spectrum and take advantage of changing market conditions.

One we like is TwentyFour Dynamic Bond. It pays an attractive yield and is managed with an emphasis on credit risk to help protect investors’ capital. The fund itself is also diversified, with a variety of ratings, geographic and sector exposures, as well as fixed income positions with different maturity profiles. In its latest update, the managers stated: “Given the combination of high yields and solid fundamentals, fixed income markets can deliver healthy returns for those who remain invested.”

*Source: Fidelity, 3 June 2026
**Source: OECD, Global Debt Report 2026, 4 March 2026
***Source: Reuters, 10 June 2026
****Source: fund factsheet, 31 May 2026