Redefining Core Fixed Income: The Case for Loans

Timothy J. Gramatovich, CFA

As we enter 2026, we believe it is time to reframe how investors think about fixed income markets. Traditional “core” fixed income portfolios – comprised of Treasuries, Agencies, mortgage-backed securities, and investment grade corporate bonds – have historically served two primary purposes: providing contractual income and, more importantly, acting as a ballast within a broader portfolio.

In risk-off environments, a flight to quality typically meant that high-quality fixed income attracted capital flows and provided a natural hedge, particularly through government bonds. That dynamic is no longer reliably in place. While it may be premature to declare the hedging role of fixed income entirely defunct, it is certainly under strain.

This challenge is not just unique to the United States. Fiscal discipline has eroded across much of the developed world, including the United Kingdom, Canada, France, Italy, and Japan. Even Germany – long viewed as a model of fiscal restraint – is now forecast to run a budget deficit equal to 4% of GDP in 2026. More importantly, there appears to be little political will across developed markets to materially alter this trajectory.