Prudent and prepared: Navigating the bond market in 2026

By Chris Salih on 20 July 2026 in Fixed income

There is no doubt the high yield bond market has its challenges at the moment. Persistent macroeconomic uncertainty, elevated interest rates, geopolitical tensions, and slowing economic growth have created a complex backdrop for both issuers and investors.

Credit spreads are tight, and refinancing pressures are mounting as companies face significantly higher borrowing costs than those available during the low-rate era. Rigorous credit selection, disciplined risk management, and a strong understanding of issuer fundamentals have become more important than ever.

A guide to Invesco Bond Income Plus Limited

Credit spreads on their own are historically tight. Figures from the ICE Bank of America European High Yield Index sit at just 277 basis points (bps)*. Figures from the ICE Bank of America Global High Yield Index typically place spreads for high yield at around 550bps, although these are elevated due to periods of stark volatility – such as the Global Financial Crisis when spreads hit 2000bps**. It is no longer a “rising tide lifts all boats” environment – active managers must not only be very selective in terms of opportunities but also avoid issuers whose financial resilience may be tested as market conditions evolve (something which may not appear obvious at first).

That’s the view of Cathal Dowling, product director on the Invesco fixed income team and part of Invesco Bond Income Plus Limited (BIPS). BIPS aims to provide capital growth and a high income by investing predominantly in high-yielding fixed income securities.

The portfolio is well diversified across countries and industries and has maintained a consistently high level of dividends for many years. The final portfolio typically holds between 210-260 positions. Rhys Davies has managed the portfolio since 2014 (with co-manager Ed Craven joining in 2020). Over the past ten years the trust has returned 70.6% to investors***, in addition to a very attractive dividend yield (currently 7.02%)***.

BIPS is the result of the May 2021 merger between two investment trusts (City Merchants High Yield and Invesco Enhanced Income), with BIPS being a continuation of the former. Following the merger, the quarterly dividend was increased from 2.5p to 2.75p (11.0p per annum) per share; this has continued to rise and now stands at 12.25p****.

Why now for this portfolio

• Strong long-term performance over the past decade.
• Has grown its dividend consistently in recent years (targeting 12.25p per share in 2026).
• Dividend cover of 1.07x with the underlying income generated by the portfolio comfortably above the stated dividend****.
• The huge resource at Invesco allows the team to look at opportunities in the UK, Europe and the US.
• Market cap of almost £500m gives them scale to wait for opportunities, with Rhys and the team demonstrating an ability to find them in volatile periods.
• The team have increased their exposure to higher-quality/secure assets in the current market and are happy to wait for opportunities.
• Exposure to more illiquid positions – particularly within subordinated financials (something which cannot be replicated as easily for open-ended vehicles).

Investment process

Targeting three broad areas of high yield

The portfolio invests across three broad areas of the market. Income generators (bonds issued by non-financial companies that pay a high level of income) form the core of the fund. Alongside this segment are banks and subordinated financials – bonds in this area of the market continue to pay a premium over other areas of the market. The final area is credit-intensive bonds – these are bonds the team feel can turn around performance having come under significant price pressure.

The team’s investment universe has around 780 names, although this does not include several subordinated financial instruments, which can take this to over 1,000. The process starts with Rhys building a macroeconomic overlay for the trust. This allows him to look at the broad areas of the market in which he sees potential opportunities.

The main research is around credit analysis, where the 19-strong research team look for credits that have visible cash flows and good fundamentals. The aim is to maximise returns from acceptable and understood credit risk exposure.

The next element is a valuation assessment. This looks at the risk/return profile of any bond in relation to cash, core government bonds and the rest of the fixed interest universe. The team also look at risk considerations, analysing all holdings to understand the risk involved to ensure diversification in the portfolio.

The portfolio managers enter the majority of positions with a view to holding them until their call or maturity date, with the investment process based on making investments where the yield to maturity or call appears to them to be at least an adequate reward for the risk. Portfolio turnover is expected to be very low as a result.

The team look across the entire market for value, which can include CCC-rated bonds and occasionally a distressed name if they believe there is value in the opportunity, for example a route out, such as new management or a restructure.

A view from the investment team

Having been defensively positioned throughout 2025, Cathal says Rhys and the team felt we entered 2026 with a relatively attractive backdrop for the credit market – citing falling interest rates and some growth and improved earnings

“We had tight spreads – but things were constructive. Since then, we’ve had war in the Middle East and a tightening up in the market with interest rate expectations rising sharply, before relaxing in recent months.”

He points to nominal returns across the bond market in the first half of the year as a reflection of the changing momentum with interest rates. The team have excelled in periods of market volatility, so Cathal says they were surprised there were so few opportunities amid the volatility in March 2026 – particularly in comparison to the opportunities thrown up by Liberation Day in April last year.

He says the team has found some opportunities away from Iran – highlighting software companies, due to the unknowns around the impact of AI on their models.

“This was particularly the case in consumer tech, where we felt companies were being unfairly priced down on the view their model was being invalidated by AI,” he says.

He says there were three points investors tended to overlook. Firstly, owning data is important to these companies and they are also more than capable of using AI themselves. The third Cathal points to is that, as bond investors, their focus is getting their coupon paid.

“We are not concerned about these companies being market leaders in 2040. We want them to be sustainable – regardless of AI – to the end of the bond and that is job done for us,” he says.

Other defensive opportunities

Tight markets have meant an increased focus on good credits from the bottom up. Physical assets have been a focus, such as pub business Punch Taverns, which has a resilient income that can be passed on by the business. Cathal says it is a defensive name because it is asset rich. Although it is a pub, Punch don’t have the traditional challenge as they own the physical asset and franchise out the pubs – with the publicans taking the risk. It yields 7.3% and has EBITDA growth*.

Other examples of defensive businesses include TMD Friction, a German auto parts supplier with exposure to both new vehicles and the aftermarket. Cathal says the bond was secured at EUR 8.25% (2031) and currently yields north of 7%*. He says: “Auto parts are a favourite of ours as they are always in demand and seldom negotiable. The market has regulatory barriers to entry and solid freecash flow and manageable leverage.

Shape of portfolio and other recent activity

As mentioned, manager Rhys Davies continues to view the market overall as quite expensive, leading to the trust’s continued defensive positioning. He has a relatively high proportion of the fund in investment-grade debt rather than high yield.

As of May 2026, BIPS currently has 69.2% in high yield and 26.8% within investment grade. Roughly 4% of the portfolio is held in gilts, US treasuries and some European government bonds^.

Looking in further detail at the underlying allocation, we can see almost 45% is held in corporate high yield while over 30% is held in subordinated financials^ – these are a useful tool for the team as it allows them to use the junior debt of banks and keep the yield high for BIPS. Cathal says the segment produced some good performers in the past 18 months, particularly in the smaller and less liquid issues which are more accessible within a closed-ended structure.

Examples include UK Digital Bank (Atom Bank) as well as Newcastle Building Society and Saffron Building Society – all of which have double-digit coupons****.

Cathal says the trust’s subordinated financials exposure is now relatively defensive, with 23% in banks and 7% in the insurance sector. He says roughly half of the bank exposure is in Tier 1****.

He says: “It was a relative valuation call to cut back on subordinated financials about 18 months ago – and there is an argument that we have been too cautious on subordinated banks as they have continued to rally.

“We’ve been tending to take less risk because it is more expensive and the new deals that are coming are not that attractive. Vintages of subordinated bank debt for 2026 are like 2021 – these had a low coupon and unattractive reset terms if the coupon is not called.”

One example of a less liquid position they did add more recently was United Trust Bank, a specialist lender with a 13% coupon****. Cathal says it is growing earnings and returns on equity.

Cathal says they also have 6% in hybrid bonds – these have the quality of investment grade credits but with some subordinated risk (although they are less risky than high yield bonds).

The result is a defensive portfolio which still yields just over 7%*** – Cathal says while falling interest rates can give them some opportunities, increased volatility is where active managers can really benefit from here.

Other recent buys in the portfolio include Cheplapharm (EUR 6.75% 2032 – B rated) – a family-owned specialty pharmaceutical company headquartered in Germany – and Mahle (EUR 7.125% 2032, BB- rated), a German auto parts company****.

Cathal says they have also added Wagamama (GBP 8.5% 2031, B rated)****. He says: “Restaurants is definitely a riskier part of the market; Wagamama has been very successful but faces challenges that all names in the sector do. It was priced in the mid-80s when we bought, so that’s a yield of about 13%.”

Sales include healthcare name Clariane – while the team have trimmed position in INEOS and Morrisons, both of which follow recoveries****.

Performance

The trust has returned 70.6% (share price) and 72.3% (net asset value) over the past 10 years***, compared with a 63% return for the ICE BofA European Currency High Yield Index (GBP Hedged)^^.

Over three years (since BIPS has started to increase its credit quality), it has returned 45.6% (share price) vs. 43.3% for the benchmark^^^.

What else do investors need to know?

• The portfolio has an official gearing limit of 30% of net asset value, although this currently stands at 12%*** – they tend to increase this during periods of volatility to enhance returns.
• BIPS is one of the few trusts that has managed to consistently operate on a premium – it currently stands at 1.8%***. Like many closed-ended investment trusts, BIPS retains the ability to buy back shares should it need to manage a discount.
• As mentioned, stated dividends per share stand at 12.25p – with BIPS current yield standing at 7.1%***.
• Ongoing charges stand at 0.85%***

Outlook

BIPS is a strong consideration for any investor looking for a consistent income. While the bond market is tight at present – the portfolio offers a defensive option with exposure across the market. The result is an attractive yield above gilts and cash.

Rhys is supported by a huge team at Invesco which gives them the opportunity to find value across the UK, Europe and the US. This, coupled with strong cash reserves, means they are ideally positioned to move into higher-yielding credits (and boost income levels) when markets do begin to see greater volatility.

The trust currently has a stated dividend per share of 12.25p, something it has held or raised each year for over a decade. While there may be greater returns on the horizon, for now investors are still being paid well to wait.

*Source: Invesco, June 2026
**Source: Janus Henderson, figures from 30 November 2004 to 30 November 2024
***Source: AIC, at 14 July 2026
****Source: Invesco, July 2026
^Source: fund factsheet, 31 May 2026
^^Source: FE Analytics, total returns in pounds sterling, 14 July 2016 to 14 July 2026
^^^Source: FE Analytics, total returns in pounds sterling, 14 July 2022 to 14 July 2026