Opportunity in the dislocation: why fixed income is back in focus

For much of the past decade, fixed income investors have been forced to search hard for yield. In 2026, that dynamic has shifted – abruptly.

Following a volatile March, markets are presenting something not seen in years: the ability to access high-quality credit at genuinely attractive yields. And while uncertainty dominates the macro backdrop, for many investors, that uncertainty is precisely where the opportunity lies.

Market Conditions in Early 2026

At the beginning of the year, the tone was unequivocally strong. Healthy demand was driven by a familiar trio: offshore buyers, particularly from Asia; domestic private wealth channels; and a structural bid from retirees seeking income. Issuers and investors were well attuned. ‘When we started the year, in January and February, we were probably on record pace for new issuance,’ says Roy Keenan, co‑head of Australian Fixed Income at Yarra Capital Management. ‘We participated in more deals in the first two months of the year than we had in the previous four months.’

Then came the outbreak of war, as February turned into March over a weekend. A combination of rising global yields, widening credit spreads, and geopolitical uncertainty – particularly around energy markets – shifted sentiment. Australian government bond yields climbed to levels not seen since 2011, while spreads moved wider across credit markets. Activity ground to a halt across the market, as energy prices soared with fears of oil shortages.

RBA Tightening and Market Pause

“For us at Yarra, it wasn’t just the war,” says Keenan. “To be perfectly honest, we started March on the back foot, because we didn’t expect the RBA to tighten as aggressively as it did. So, we sat back and watched for the first couple weeks of March, just to assess what was happening out there. But even amid the volatility, several deals came to the market as issuers tested appetite in the more cautious conditions.”

At the height of the volatility in March, issuers such as coal port operator Dalrymple Bay Infrastructure, NBN Co and Verizon Communications priced issues. “Dalrymple Bay was really well-received, it was more than 2.5 times oversubscribed. We bought some of that,” says Keenan. “We’ve never owned NBN, and we didn’t touch Verizon, because we didn’t feel that the issuer gave us enough time to get up-to-date on the credit. But Verizon certainly showed the demand for yield, and that demand for good income flows is not going away.”

Opportunities in Widened Spreads

It wasn’t only new issuance that sparked interest, he says. “During March, Australia’s interest rates got to 2011 highs, in terms of three- and 10-year bonds, and credit spreads widened a bit. In the fund we were buying the UBS Additional Tier 1 security at 7.5 per cent – only three months ago, you were probably buying it at 6.5 per cent. So, your actual ability to get set at the moment in good-quality fixed income at high rates is pretty appealing. We think that continues. There are obviously questions, what does the RBA do, what is the exit from Iran, what are the ramifications for the global economy if the Strait of Hormuz remains closed, and those are the hard part. There are some great opportunities, but at the same time, it’s about trying to discover where the problems are” says Keenan.

It is an environment in which disciplined capital deployment is rewarded. “With the opportunity in March, we deployed probably close to 3 per cent of the cash we had sitting on the sidelines or in major bank senior paper that we’d rolled-out the risk curve where. I mentioned that UBS AT1 deal, but there were plenty more of those major-bank opportunities, in Tier 2 securities, and some corporate issues that we bought – it was almost like a scattergun approach to the yield opportunity, because there were a lot of attractive trades and high-quality instruments where spreads had widened. It wasn’t so much sector-driven, but more curve-driven; we have three tightenings built-into the front end of the yield curve, so I think that five to seven-year part of the curve is probably where you’ll get the best bang for your buck.”

Private Credit Under Scrutiny

At the same time, private credit – long a beneficiary of investors’ search for yield – is facing increased scrutiny. Globally, some funds have introduced gating mechanisms, limiting redemptions and reinforcing a reality often overlooked during benign conditions: private credit is, by design, illiquid. For some investors, this has been construed as a wake-up call, but Keenan believes the picture is more nuanced.

“Gating, in itself, is not necessarily a sign of distress. Rather, it reflects the structure of the asset class. In exchange for illiquidity, investors expect an excess return,” says Keenan. “When that liquidity is tested, the trade-off becomes more visible.”

Encouragingly, he says, feedback from managers suggests underlying loan books are, in many cases, performing well. If that proves accurate, the current period may represent more of a recalibration than a systemic issue. That said, risks are emerging – particularly in segments such as construction and development lending. Rising input costs, wage pressures and higher interest rates are compressing margins, while end-demand remains uncertain.

“That’s not a good recipe for that sector,” he observes. “That’s why I don’t like putting all ‘private credit’ in one bucket, because there’s corporate lending in a market like North America, and there’s property development debt in Australia, and they’re not the same. Investors have to make sure they understand that.”

Monetary Policy Debate

Overlaying all of this is the question of monetary policy. The Reserve Bank of Australia has tightened aggressively, responding to concerns about inflation. Yet there is growing debate about whether those concerns are overstated – or at least mischaracterised.

Some argue that recent inflation dynamics are less about excess demand and more about supply-side factors, including government policy settings. If that is the case, further rate hikes may do little to address the underlying drivers.

More importantly, financial conditions have already tightened. “Elevated fuel costs do a bit of the RBA’s work for it, in the sense that it is contributing to a de facto tightening, potentially reducing the need for additional policy action. But I think the risk of recession has to be increasing,” Keenan says.

For the RBA, the challenge is clear. Tighten too far, and the impact on leveraged households and cyclical sectors could be severe. Pause too early, and inflation expectations risk becoming entrenched.

Fixed Income Outlook

For fixed income investors, however, the equation is simpler. While the path of rates, inflation and global growth is far from clear, the starting point – yields, spreads and valuations – has improved meaningfully. In that sense, the current environment represents a shift from the conditions that dominated the past decade. No longer is fixed income a defensive allocation offering limited return. Instead, it is re-emerging as a source of both income and opportunity – provided investors are willing to navigate the complexity.

“Everyone’s got a different view on the timing, but if you close your eyes and ears to the headlines and you look at what’s in front of you in the fixed income market, it’s a pretty good opportunity,” says Keenan.

In a market defined by uncertainty, that may be as close to conviction as it gets.