Investment Focus: Fixed Income Investments Explained
Bonds, Risks & How to Invest (2026)
Written by Boring Money
17 Feb, 2026
Fixed income – bonds issued by governments and companies – is back doing its job: paying an income and cushioning portfolios when stock markets wobble. But rising government debt, volatile politics, and tight credit spreads mean today's bond markets carry more complexity than usual. Here's what investors need to know.
Fixed income: not so boring anymore
Fixed income should be the boring part of an investment portfolio, providing some stability while stock markets do the heavy lifting on growth. In theory, investors should buy a bond, receive an income, and get their money back at the end. However, they have been in the headlines, with prices bounced around by burgeoning government debt, shifts in interest rates, and geopolitical uncertainty.
Bond markets have been the focus of considerable attention. Developed market governments have built up significant debt, which has left them in thrall to bond investors to fund their borrowing. Volatile politics have also played a role. Governments that choose to play fast and loose with the public purse have been quickly slapped down by bond markets. Most governments recognise that if they spook bond markets, their borrowing costs could spike to unsustainable levels.
This has created volatility in bond markets. Long-dated government bonds have seen the lion’s share of this excitement. Long-dated bonds are seen as more vulnerable to long-term interest rate expectations, while shorter-dated bonds are anchored by the current level of interest rates set by central banks.
One thing we see that’s a constant is the interaction between economics and politics. In the US, we’ve seen politics come to dominate market moves. While that’s often expected in stock markets, global bond markets have tended to look through the political cycle and be more focused on the long-term. But that boring period where you can just focus on economics and not worry about the politics is coming to an end.
Nevertheless, this doesn’t negate the role of bonds in a portfolio. They are still an option to generate income, for diversification and for some capital protection for investors. But there are some risks inherent in bond markets today of which investors need to be aware.
What are government bonds?
Government bonds are debt issued by sovereign nations. This borrowing may be used to fund day to day expenses, such as welfare payments, or to support large capital spending projects, such as infrastructure development. The interest rate will depend on the creditworthiness of the government issuing the bonds, along with the prevailing level of interest rates and inflation.
Most developed markets are considered very low risk because they have never defaulted on their debt, and can always raise taxes or devalue their currency to repay their creditors. However, more recently, debt levels have been rising, and this has created some nervousness in bond markets.
For example, the Japanese government has a debt-to-GDP ratio of 232%[1] (for context, the UK’s is 95%).[2] This became an issue in the recent election, when Prime Minister Sanae Taikachi stood on a mandate of ‘spend for growth’. Long-dated Japanese bond yields spiked higher in response. The level of US government debt and the inability of the government to cut spending have also weighed on the US Dollar over the past 12 months, while the UK’s debt situation has been an important factor in the weakness of the current government.
What are corporate bonds – and what is a credit spread?
Corporate bonds are fixed income instruments issued by companies. The price of individual corporate bonds is determined by the yield
on the government bond, plus a ‘spread’ to account for the additional risk of investing in a company. That spread will be lower for ‘investment grade’ bonds, issued by higher quality companies, and higher for ‘high yield’ companies, issued by weaker companies.Companies receive a credit rating from the major credit providers such as Moodys, S&P, and Fitch. However, many active investment managers will also do their own research, coming to their own conclusions on a company’s creditworthiness.
More recently, credit spreads have declined significantly, meaning that investors receive a lower income for the risk of investing in government bonds. This has been a cause for concern, with some investors worried that corporate bond prices may not adequately reflect the risks in the market.
Stephen Snowden, manager of the Artemis Corporate Bond fund, says that low spreads are not necessarily a worrying sign for investors.
Everyone is talking about the value of risky assets being quite high and credit spreads are no different. But they are tight for a reason. That’s because the risk in credit spreads has collapsed…there was a big increase in corporate and household debt in the run-up to the financial crisis of 2008. Since then, households and corporates have been paying down debt consistently. The risk of lending to companies is much lower, and there has been a big increase in lending to governments.
As a result, he says, the ‘risk free’ asset is more risky and this is why the gap has narrowed. Some fund managers will go one step further, arguing that the risk for low debt, globally-exposed companies may be less than for over-spending governments.
Should investors consider emerging market bonds?
Emerging market debt has become an increasingly popular option for investors in recent years. This is debt issued by emerging market governments and companies, and may be denominated in local currency debt or ‘hard’ currencies (usually the USD, but also Euros, Yen or Sterling).
Emerging market debt will generally pay a higher yield than developed market debt because there are considered to be greater risks in emerging market economies. However, over the past few years, investors have started to reappraise this view. A lot of emerging markets have less debt and more prudent spending policies than their developed market peers.
Polina Kurdyavko, head of emerging market debt at RBC BlueBay points out that emerging markets showed real resilience in 2025, in spite of the volatility created by tariffs. She sees a strong outlook in 2026:
Emerging market economies are poised to outpace developed markets, driven by robust domestic demand, policy credibility, and improving fiscal discipline. Inflation in emerging markets remains largely contained, allowing central banks to maintain a measured easing bias.
Lower interest rates should be good for domestic bond markets, while a weaker Dollar should also be an advantage for many emerging market currencies.
What other types of bonds can you invest in?
There are also a range of other fixed income options. For example, there are supranational organisations that issue bonds, such as the European Investment Bank, World Bank, Asia Development Bank (ADB), European Bank for Reconstruction and Development (EBRD) and Inter-American Development Bank (IADB). There are also hybrid bonds, which combine elements of bonds and equities
. These include convertibles, which are bonds that can be converted to equity.There is also a growing market for green bonds. The market is now almost $3 trillion, having grown almost 6x since 2018. These are bonds that have a specific “green” purpose, such as energy infrastructure. It is also possible to buy ‘social’ bonds, where the proceeds can only be used for social projects, such as housing.
What is the bond secondary market?
Bonds are issued by companies and governments, and then bought by pension funds, insurance groups, retail investors, and institutions. If a bond is held to term, the only way an investor will lose money is if the issuer fails to pay its debts. They could also lose money in real terms if inflation spikes higher.
However, bonds are also bought and sold in the secondary market. This is where most fixed income fund managers will invest. Here, investors can lose money if interest rates or inflation expectations change, or if there is a significant change in the market’s view on the creditworthiness of the issuer. A recent high profile example of this was during the Liz Truss budget in 2022. Those who held UK government bonds could simply continue to hold them and would have received their money back at the end of the term. Those trading in the secondary market would have seen the value of those bonds slump, as the perceived creditworthiness of the UK deteriorated, and investors anticipated higher interest rates and inflation.
Is now a good time to invest in bonds?
It has been a steadier few years for fixed income investors. In the aftermath of the financial crisis, interest rates dropped to near-zero in many developed markets. Fixed income could no longer fulfil one of its prime purposes in a portfolio – as a source of income. Equally, government bonds became highly correlated with other ‘long duration’ assets, such as high growth equities. There was a painful adjustment in 2022, when interest rates rose rapidly, and the average strategic bond fund dropped 11%. Corporate bonds were even weaker, with the average fund falling 16%[3].
Since then, bond investments have returned to more normal patterns of performance. They now pay an income again, with developed market government bonds yielding 4-5%, and corporate bonds another 1-2% on top of that. They also provide greater diversification with equities. The average fund in the Sterling Bond sector rose 7% in 2025.
However, as well as narrow credit spreads, there are concerns that problems are building up in government bond markets as government debt increases. Governments in the UK, Europe and the US have struggled to cut spending and bring debt under control. Investors have worried that bond markets will ultimately tire of funding vast and growing deficits while governments show little inclination to address them. For the time being, currencies have taken the strain, but this may not last indefinitely.
How to invest in fixed income
Buying individual bonds: gilts and corporate bonds
Individual investors can buy gilts through the major investment platforms. They will be available in a range of maturities and the income will generally be a little higher than a standard savings account. However, investors will usually have to be prepared to hold the bond until the end of the term. Any gains are exempt from capital gains tax. While the retail bond market has grown in recent years, it is still difficult for individual investors to buy specific corporate bonds.
Bond funds: how do they work?
There are a range of collective funds, which provide diversified exposure to bond markets. Government bond funds focus exclusively on sovereign bonds, aiming to harness the best opportunities across global bond markets. These funds will often rely on considerable macroeconomic analysis to forecast the likely trajectory of different economies.
Corporate bond funds will invest in a range of carefully-selected corporate credit. Fund managers will often focus on strong credit analysis to identify bonds that have been mispriced by the market. Strategic bond funds have more flexibility and will tend to combine government and corporate bonds depending on the market environment. Most collective funds will also incorporate some duration management – varying the amount of long and short-dated bonds depending on their view of interest rates.
Bond ETFs: passive and active options
There are passive
options for fixed income, but it is worth noting that most passive fixed income options are based on market capitalisation-weighted indices. That means they will have the highest weighting in the most indebted issuers. This can be a riskier approach than an active fund. Nevertheless, Vanguard, iShares, and Invesco have popular ETFs based on a range of fixed income indices, and the market is currently $3.2 trillion in size.Active
ETFs are also becoming more popular. These may not be market-cap weighted, but may be equal weighted, or optimised according to other factors, which could reduce some of the risks. Groups such as JP Morgan, Invesco and Goldman Sachs have been active in this market.Are bonds a good investment right now?
There are risks in global bond markets today, with sovereign debt at all time highs for many developed economies. Corporate bond spreads are also a factor for investors to consider. That said, bond markets are vast and offer expansive choice for investors. Skilled fund managers should be able to navigate the risks.
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[3] Trustnet, 2022
