This article was produced by Wellington Management as part of their valued industry partnership with Insurance Investor.
For fixed income markets, 2025 may be a hard act to follow. High carry, tighter spreads, and accommodative monetary policy all contributed to impressive total returns. That said, we still see attractive opportunities for insurers. While inflation bears watching amid questions about tariff policy and Federal Reserve independence, we think fiscal stimulus, AI spending, and deregulation could lift growth, which should bolster spread sectors. There are risks to our outlook, of course, including worries about consumer spending and manufacturing, but bouts of volatility could also open attractive entry points for sector rotation and security selection. Taking all of this into account, we think insurers may want to take some risk off the table in 2026 but still maintain a cautiously optimistic approach.
Against that backdrop, here are some fixed income ideas to consider:
1. Investment-grade private credit — We maintain a constructive view on investment-grade private credit, positioning it as a strategic complement to traditional fixed income allocations.
The asset class has continued to deliver attractive illiquidity premiums, providing meaningful relative value in a market where spread opportunities remain constrained. Strong covenant protections and bespoke structuring enhance downside resilience, while robust deal flow across sectors and geographies supports diversification and portfolio stability.
2. Securitised credit — We hold a constructive view on securitised credit, seeing it as a potentially valuable source of diversification and income within multi-sector fixed income portfolios.
Despite tighter spreads across most credit markets, securitised sectors continue to offer attractive yields relative to investment-grade corporates, supported by structural protections and shorter spread durations that can help cushion against volatility. Fundamentals have been normalising from strong levels, with performance expected to vary by subsector and borrower type, making security selection critical.
3. CLO equity — While we acknowledge the near-term CLO arbitrage rate remains tight, we view CLO equity as an attractive intermediate to long-term investment opportunity, supported by two rare and meaningful regulatory tailwinds. In the US, recent guidance easing leveraged lending constraints could allow banks to re-enter the broadly syndicated loan market, increasing loan supply and potentially widening spreads at a time when M&A activity is expected to pick up.
This shift may also reintroduce higher-risk borrowers into syndicated markets, creating opportunities for active managers to capture incremental yield. Meanwhile, in Europe and possibly the UK, proposed regulatory changes are set to make senior tranches more appealing, particularly to insurers, by reducing capital charges and streamlining due diligence requirements.
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