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Fri, Jan 16, 2026 | Rajab 27, 1447 | Fajr 05:45 | DXB 
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Why 2026 may be the year investors need to revisit the bond side of their portfolio
While record-breaking stock markets dominated the headlines in 2025, a massive surge in some bond sectors has created what experts call a “generational opportunity” for the new year
Investors may be spending too little time thinking about the bond side of their portfolio.
Bonds are the less flashy cousins of the world’s equity markets. Many stock markets have seen double-digit gains this year, but bonds serve an entirely different purpose. They can provide steady income in a portfolio and in theory should be the ballast, providing stability and acting as a hedge when stock markets are volatile.
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Pimco’s Marc Seidner says there’s currently “an almost generational opportunity” in fixed income where the right mix of bonds could generate a decent, “equity like” return without a lot of exposure to lower quality credits.
Bonds also come in all types of issuers, maturities and styles. There are short-term issues that can have a maturity of as little as one week, or longer-term bonds with a duration of 10 years, 20 years or longer. Credit quality is also important. Bonds are rated by rating agencies and can range from top tier to distressed.
Investment grade bonds are rated AAA to BBB. Those bonds rated less than BBB are considered non-investment grade and are viewed as inherently having more risk.
There is sovereign debt, issued by the world’s governments, quasi-sovereign bonds, corporate bonds, and high-yielding corporate or ‘junk’ bonds. Bonds issued in Emerging Markets (EM) are in their own classification, and in aggregate, those were the best performers of 2025.
“The EM debt sector has outperformed almost every other credit asset class this year. It has to do with the fact that the EM countries exhibited a significant amount of resilience, despite all the head winds that persisted through the year,” said Cathy Hepworth, head of PGIM’s emerging market debt team.
Seidner said he currently favours bonds with durations in the two-year to five-year range and says a mix of bonds can generate a solid return.
“Fixed income has given you a chance to lock in 6.5 per cent or maybe 7.5 per cent,” said Seidner who is Chief Investment Officer of Non-traditional Strategies. “How can you not get excited about something that does a lot of the heavy lifting in an allocation in the simplicity of an intermediate duration bond portfolio.”
The weaker US dollar helped EM debt this year, and worries about US policy ended up being overblown. While US tariff rates are not all finalised, “it’s not necessarily as detrimental as we have thought,” Hepworth said. “Global growth is slowing. Some of that is cyclical, but there’s still a good amount of trade happening.”
EM hard currency sovereign bonds returned about 13.8 per cent in 2025 through mid-December, while EM local currency debt returned 18 per cent, based on J.P. Morgan indexes. Hard currency debt can be issued in US dollars or euros. Hepworth expects good performance in 2026 but says investors will have to be very selective about the countries they choose.
J.P. Morgan’s index for high-yielding EM hard currency sovereign debt returned 17 per cent, but high-yielding hard currency corporate bonds returned a much lower 8.5 per cent. Investment grade corporate bonds in the J.P. Morgan Corporate Broad EMBI Diversified High Grade Index returned just 8.2 per cent.
“Investors are still looking for yield,” Hepworth said. “Rates are still relatively high, so yields are attractive.” For investors, EM debt is a “high carry, high yielding asset class.”
Return on the hard currency sovereign index for 2026 “could be 5 to 6 per cent. Very different. I think the important point here is there was decent dispersion of return this year, between investment grade, BB and the real distressed,” said Hepworth, adding she expects to see even more dispersion in returns in 2026.
Debt ratings upgrades from rating agencies helped performance in 2025 with some countries improving and moving up to BB. “We’re very comfortable with BB EM sovereigns. A lot of them happen to be in Latin America—Dominican Republic, Guatemala, Costa Rica,” she said. She also sees opportunities in South Africa, Ivory Coast, Turkey and Serbia.
Indonesia and India are two markets that are already investment grade rated. In the Middle East, Hepworth favours quasi-sovereigns in both the UAE and Saudi Arabia. She did not specifically name them, but Mubadala, TAQA, and DP World are all examples of quasi-sovereigns. Saudi Aramco and the Saudi Public Investment Fund are also in that category.
Peter Boockvar, CIO at One Point BFG Wealth Partners, warns that bonds don’t always work the way investors want them to.
Longer duration bonds in developed markets like the US, UK or Japan in recent years have actually been a negative in portfolios. Inflation and high debt levels have worried investors, and interest rates rose from very low levels in some countries.
“In emerging markets, there’s potentially greater opportunity because if the world is worried about debts and deficits, much of the emerging markets don’t have those problems. You’re dealing with different monetary policy relative to inflation for these countries. There’s more comfort taking duration risk with a country that has positive real interest rates,” he said.
Boockvar said, for instance, a Brazilian two-year bond was yielding about 10 per cent in mid-December. The central bank’s “benchmark rates are well above the rate of inflation…their benchmark is 15 per cent and their inflation rate was last reported at 4.5 per cent. They have a real yield of over 10 per cent,” he said.
The strong performance of commodities markets have helped EM economies, but analysts also warn there could be political risk and elections can change the fiscal outlook.
Bonds can be purchased in many ways. Investors can buy a closed-end fund, an open-end fund, an Exchange Traded Fund or individual securities. Investors need to be aware of currency risks with bonds they purchase. Boockvar likes EM local currency bonds as opposed to dollar-denominated bonds. Those issues could perform better if the US dollar continues to weaken.
Many issuers have both dollar or euro denominated bonds and bonds in their own currencies. The UAE, for instance, issues T Bonds in Emirati Dirham (Dh). The UAE government also issues T-Sukuk, which are Islamic Sharia-compliant financial instruments denominated in Dh. The UAE is considered a developing country. It is classified by global bond indices as an emerging market.
The J.P. Morgan MECI UAE Investment Grade Custom Index is made up of the UAE Investment grade dollar-denominated corporate, quasi-sovereign and sovereign bond issues. Chimera JP Morgan UAE Bond UCITS ETF tracks the index.
Boockvar said Bloomberg puts the total return of the ETF at about 8 per cent for 2025 through mid-December.
The emerging world has been actively issuing new debt. EM sovereigns, quasi-sovereigns and EM corporates issued a total of more than $600 billion in debt in 2025, according to Hepworth.
According to Dealogic, Saudi Arabia’s $12 billion sovereign offering in January was the largest single 2025 issue of any country in the Middle East. Kuwait also had a large offering of $11.3 billion in September.
The gross issuance for EM Corporates and quasi-sovereigns is around $450 billion for 2025, up from $402 billion for 2024, according to Hepworth. She said that increase was driven by growth in Middle East quasi-sovereigns and Asia investment grade debt.
“The expectation for 2026 is that gross issuance remains elevated with higher quality Middle East bonds continuing to grow given the investment needs. We expect the infrastructure area to provide opportunities across transmission grids, renewable power, telecom fibre, and transportation,” Hepworth noted.
She said there was strong demand for the issues, including from within EM countries including the GCC.
Loading up on bonds is not the right move for everyone, but 2025 returns for the right mix of bonds have been good and are expected to be in 2026 as well.
“If you are 20-years-old, bonds should be relatively small,” said Seidner. “If you are middle-aged or older, you should be thinking about a glide path to the higher fixed income allocations over time.” He said for the latter group, consider the traditional 60 per cent stocks, 40 per cent bonds portfolio mix as a starting point, and then grow more conservative by adding more fixed income over time.
Bonds are an important part of the portfolio for many investors and can be a way to generate income. But it is important to understand what type of risk they represent, how the duration matters and how currency exposure can impact returns.
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