Bond Watch: four funds for different types of investors

Entering 2026, fixed-income investors face an unsettled macro landscape, namely volatile US trade and foreign policy, downward pressure on the US dollar and geopolitical uncertainty continuing in Iran and Venezuela.

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The Bank of England and the US Federal Reserve are digesting indicators of disinflation and softer labour markets, spurring cuts to base rates in 2025, which is anticipated to continue in 2026. Meanwhile, concerns over growth and fiscal credibility steepened yield curves.

However, a focus on debt-laden G7 government finances risks overlooking encouraging factors. UK and US household debt remains low and stable.

US consumer wealth is near record levels. Broadly, corporate earnings have been strong, and lower borrowing costs may support certain sectors.

In short, consumer and corporate balance sheets are in decent shape (see the UK Financial Stability Report and Fed Financial Stability Report).

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For bond investors, higher starting yields may offer attractive lower-risk options for the more cautious.

Meanwhile, high-quality global bonds offer a diversified core option, and geopolitical volatility may throw up opportunities for adventurous investors, as we saw with the great performance of regional bond markets (for example, Brazilian and Mexican bonds) in 2025.

Options for cautious investors

Money market funds enjoyed continued inflows in 2025 and served cautious investors well.

However, the Bank of England cut rates four times in 2025 (from 4.75% to 3.75%) and any future cuts would be quickly reflected in money market fund yields.

While they still offer attractive yields, they could be diversified by short-dated high-quality government and corporate bond funds, which invest in typically high-quality, short maturity bonds (circa one to three years) but longer than money market funds (typically 50 to 60 days).

Given the shape of the yield curve, these may offer higher yields than money market funds (or cash) and lock them in for longer.

One option is the L&G Short Dated £ Corporate Bd Idx I Acc fund, which invests in investment-grade sterling bonds with less than five years to maturity, tracking the Markit iBoxx GBP Corporates 1-5 Index. The distribution yield is around 4.7% and the fee is 0.14%.

Investors may also consider direct gilts with one to five-year maturities. Gilts are secured by the creditworthiness of the UK government and aren’t subject to capital gains tax on maturity (just income tax on coupons), making low-coupon gilts a tax-efficient option.

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However, if rates keep falling, investors should be wary of reinvestment risk and may wish to diversify across maturities to avoid receiving a lump sum amid a lower-rate environment.

Core exposure

Investors seeking core exposure to regionally diversified, high-quality bonds and willing to take a bit more risk may consider the SPDR Bloomberg Global Aggregate Bond ETF GBP H GBP (LSE:GLAB), passively investing in global investment-grade debt issuances and tracking its namesake’s index. The ETF has a yield of 3.5% and the portfolio’s average maturity is eight years. The yearly fee is a competitive 0.1%.

In this area, active managers do have the advantage of taking top-down macro decisions, adjusting credit quality, duration, geography, and sector allocation accordingly, and/or undertaking issuer-level analysis and active trading tactics.

Of course, this flexibility also gives scope to underperform, making manager selection key. We recommend the PIMCO Global Investment Grade Creditfund, which, following the recent departure of long-tenured manager Mark Kiesel, we view as still well run under manager Mohit Mittal, who is supported by senior portfolio managers and PIMCO’s (the world’s largest fixed-income manager) analysts.

The fund dynamically manages duration (6.7 years, 0.7 years above the benchmark) being overweight duration in the UK, Japan and Australia. The fund has a current yield of 4.5% and the fee is 0.49%.

Adventurous options

Lastly, for adventurous investors seeking higher yields, tight credit spreads may seem to limit options. One area for consideration is emerging market debt, both to add a diversifying element to a portfolio and to tap into yields above those in developed markets. Interest in this more specialist sector has been supported by a flight from dollar-based assets, a falling Fed policy rate and rising commodity prices supporting export-led emerging economies.

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This is also an area where an active manager may well add value and, again, PIMCO has our recommendation. The PIMCO GIS Emerging Markets Bond Instl GBPH Inc fund invests actively in hard currency emerging market sovereign bonds with the largest allocations being Mexico, Saudi Arabia, Colombia and Chile.

The fund is well diversified and roughly half is held in investment grade-rated issuances, although investors should note the heightened political risk associated with emerging market investing.

The fund is led by Yacov Arnopolin, and the manager’s focus is principally on outperforming via assessing fundamentals, followed by active country allocation decisions and yield curve positioning. The yield of 6.5% is attractive and the fund has a good record of outperformance. It is available for a fee of 0.79%.