A new income playbook for a fragmenting world
Structural economic and market shifts mean today’s approaches to generating resilient investment income must be different
Geopolitical events make news by the minute. But behind the headlines, longer-term forces are driving change in ways that impact all asset classes. For investors requiring a dependable income, in particular, this requires a new approach.
Today’s investment landscape is characterised by two interlinked trends: divergence and dispersion.
Divergence in interest rates is quietly gathering pace, even across markets where monetary policy was historically synchronised. Events in the Middle East have the potential to exacerbate this trend.
A less globalised, more uncertain world
Source: Schroders Economics Group, Macrobond, 11 May 2026. For illustrative purposes only. Forecasts are not to be relied upon.
Fiscal policies appear similar across the world, but they conceal divergence in crucial dynamics such as deficit spending and debt sustainability. These could widen further if, for example, indebted G7 countries (including the US) significantly increase spending on defence or other areas. In the case of the US, this would have implications for the path of the dollar and the relative attraction of international markets.
These factors create volatility and uncertainty, feeding into the second trend of dispersion. After more than a decade of interest rates at near-zero, the return of a persistently higher cost of capital is re-introducing dispersion – across sectors, balance sheets and countries. As a result, we expect more idiosyncratic defaults and downgrades, and more reassessments of business models.
In credit markets, successful investing now demands more intensive analysis and careful portfolio construction – but there are compelling opportunities for alpha hunters.
In higher income credit, companies are increasingly turning to direct lending and syndicated loans among their debt financing options, alongside traditional public markets. Investors can potentially optimise outcomes by similarly thinking of high income credit as a continuum, not individual silos.
In multi-asset portfolios, the breakdown in traditional correlations is reshaping how diversification works, with asset classes increasingly moving together during macro shocks. Investors need to source truly independent return drivers and think more holistically to keep portfolios resilient.
Income options in a fragmenting world
“Income” means different things to different investors. For some the requirement is focused on consistency of income stream, with nominal yield a priority. For others the need may be centred more on inflation protection and/or enhancing total returns.
A successful approach to meeting these in today’s conditions will rest on a number of key elements. One is an unconstrained access to income sources across regions and asset classes, from traditional bonds to income-generating equities and alternative income sources. In addition, active asset selection is essential to unlock hidden income opportunities and manage portfolio risk.
Credit: the importance of globally active bond selection
Conditions in the credit market underscore the need for selective investing. Global yields are near multi-decade highs, but there is enormous divergence across geography and maturity. What’s more, spreads are very tight.
Navigating this successfully demands top-down consideration of different macro outcomes combined with issuer-level research to uncover bottom-up thematic opportunities. Meanwhile, an agile approach to asset allocation helps avoid bias to certain regions or asset classes. Bringing these together is crucial in order to quickly adapt to changing market conditions to seize income opportunities.
This dynamic approach is of particular value given the current market backdrop of divergence and dispersion. This provides huge opportunity – but only for those who are active in their bond allocation and capable of taking advantage of fast-changing and disparate economic conditions globally.
For example, emerging market local currency debt fits this environment well. Country-level differences in policy credibility, fiscal balance and inflation outcomes are increasingly driving returns, creating a wider spread of outcomes than in more homogeneous developed-market bond markets. This has left parts of the EM local universe offering some of the highest real yields in global fixed income, often supported by improving fundamentals.
Fiscal concerns are largely a developed market problem, but the juiciest yields are still in EM
Source: IMF, Macrobond, Schroders, December 2025
Corporate credit markets also clearly illustrate the need to be active. Spreads over government bonds are very tight. On average, there’s little reward for taking on credit risk. But it’s a different picture when we look within each asset class. Not every bond is clustered around the median yield. The chart below shows the example of euro high yield but there is still sizeable dispersion within most asset classes.
Bonds are not all clustered around the average yield
Source: Schroders, ICE, 3 March 2026. Yield dispersion range after excluding ±5th tightest/widest yield.
This is where an active, research-driven approach comes to the fore in its ability to identify those issuers with strong fundamentals that can generate alpha for the portfolio and the income that clients seek.
The return of higher funding costs is reshaping markets and re-introducing dispersion across geographies, industries, and corporate balance sheets. This may lead to more frequent issuer-specific defaults and downgrades, alongside deeper scrutiny of corporate business models and refinancing strategies.
For credit investors, that means generating returns increasingly depends on rigorous fundamental research and disciplined portfolio construction. There are compelling opportunities for investors able to differentiate risk with precision.
Julien Houdain, Head of Global Fixed Income, said “Bond yields, even after adjusting for inflation, provide an attractive starting point for investors, with the resulting level of income offering a reliable and stable source of return. However, increasing dispersion across regions and sectors means that selectivity is key.”
Seeking income across the credit continuum
The global credit landscape has undergone a profound transformation in recent years, with private credit emerging as a powerful force alongside traditional public markets. This shift is as evident in Europe as it is in the US. Companies are adding private credit to their debt financing toolkit.
Share of European corporate leveraged market
Source: Fidelity to March 2026. Morningstar European Leveraged Loan Index, Pitchbook LDC, Bloomberg Barclays Pan-European High Yield ex-financials Index, Preqin (2025 estimate) data to Dec 2025.
Meanwhile, investors seeking higher income are no longer looking only at high yield credit but at private credit (both direct lending and syndicated loans) due to the prospect of attractive returns and portfolio diversification.
While they share a fundamental credit underpinning, high yield bonds, syndicated loans and direct lending each bring different attributes to an investment portfolio:
- High yield bonds: Higher income, diversified credit exposure with tradeable liquidity, alongside relatively higher market price volatility that can provide potential for price appreciation.
- Syndicated loans: Floating rate income with typically lower interest rate sensitivity than bonds; potential for price appreciation; tradeable liquidity, albeit to a lesser extent than bonds; some credit risk.
- Direct lending: Potentially higher contractual income and stronger structuring control in exchange for illiquidity and less transparent valuations.
Public and private credit are often treated as separate asset classes. However, managing allocations in isolation can have significant negative consequences. Investors may miss out on optimal outcomes: capital becomes trapped in the less liquid segments, and opportunities for more effective diversification of risk and exploiting cross-market arbitrage are missed. Moreover, the lack of integration can lead to overlapping or offsetting risk, especially when, for example, one issuer may issue bonds and borrow privately at the same time.
In reality, public and private credit are subsets of the same asset class. Borrowers will switch between or even blend public and private debt based on their financing needs or changes in market conditions, and they will exploit inefficiencies in the cost of financing.
For example, a few years ago we saw companies shift away from syndicated loans and towards direct lending, driven by the greater flexibility this offers. In 2025, this trend reversed as lower interest rates and new features made syndicated loans more competitive again.
This switching behaviour underscores the fluidity between public and private credit markets and highlights the need for an agile and integrated investment approach.
High yield bonds, syndicated loans and direct lending are all corporate credit, but deliver returns in different ways
Source: Schroders, Pitchbook LCD, UBS West European, Non-USD Loans Index, ICE BofAML Euro High Yield B-CCC Custom Index at July 2025.
More recently, the double headwinds of potential AI disruption to the software industry and war in Iran have heightened investor sensitivity to the illiquid nature of private markets and software sector concentration in some private credit funds. A strategy with greater flexibility to diversify risk and allocate to more liquid credit structures has the potential to navigate market developments more dynamically.
Looking across the whole credit continuum enables portfolio managers to apply an active, bottom-up relative value approach that understands the relationships between public and private credit. This can unlock more return opportunities as well as deliver that all important attractive income.
Henry Craik-White, Portfolio Manager, Leveraged Finance Unit, said: “By breaking down silos and embracing a holistic strategy, investors can better navigate market cycles, manage risk, and capture opportunities across the full spectrum of corporate credit.”
Multi-asset: the importance of diversification
Multi-asset funds offer a broad range of packaged solutions for income-seekers, providing resilient income with the potential for capital appreciation and typically lower volatility than an equity fund.
The need for income is unchanged: investors want a stable income stream, regardless of the market environment. But as with credit and equity strategies, a truly global approach is required to deliver this in the current environment.
The good news is that the opportunity set is wide for investors who can navigate across the range of asset classes. In fact, the difference between the best and worst performers has widened in recent years, creating more scope for active managers to take advantage of the dispersion.
Wide dispersion across asset classes
Source: Schroders, Datastream, to 31 December 2025. Quarterly total return index levels rebased to 100 on 31 December 2019. Chart includes US equities, developed market ex-US equities, emerging market equities, Japan equities, real estate investment trusts, US aggregate bond, long Treasuries, high yield, gold and commodities.
Success depends on a rigorous and repeatable research-driven investment process. Top-down analysis plays a critical role, helping to assess how policy choices, liquidity conditions and inflation dynamics may influence relative asset class, regional and duration exposures under each scenario. These judgements shape the broad structure of portfolios, ensuring they are not overly exposed to any one economic regime.
At the same time, bottom-up analysis becomes increasingly important as scenario outcomes translate unevenly across sectors and companies. Even within similar macro environments, business models, balance-sheet resilience and pricing power can lead to markedly different results. Rigorous company-level assessment allows portfolios to capture durable income and growth opportunities while mitigating downside risk as conditions evolve.
Taken together, investing for income in a fragmenting world is likely to be less about historic static asset allocation ratios and more about the interaction between top-down scenario awareness and bottom-up security selection.
Allocations can be calibrated to optimise risk-adjusted returns, manage sector and regional exposures, and select issuers, resulting in a broad opportunity set spanning equities, real estate investment trusts, credit (both high yield and investment grade), government bonds, emerging market debt, convertible bonds and securitised debt.
Blending the top-down and the bottom-up across assets
In practice, this results in a portfolio that not only allocates across asset classes but can tilt within them to navigate market cross currents and capture opportunities. For example, currently the composition of convertibles universe looks favourable and Asian convertibles particularly interesting given their valuations and prospects. That argues for a higher overall allocation to convertibles.
An active approach to combining different sources of income can help ensure a sustainable income stream while managing volatility, in line with clients’ evolving needs.
Asset class yields: active vs index
Source: Schroders, data as at 20 January 2026. Index yield illustrates current yields and is calculated using yield to worst for bonds and 12-month forward yield for equities. Government bond includes cash. Active yield illustrates yields on active Schroders multi-asset allocations. Volatility is 10-year annualised volatility.
“2026 looks like a year in which both upside surprises and downside accidents become more common. It is, in many ways, the best opportunity we’ve seen since the Global Financial Crisis to play both sides of the distribution: to own high-quality income and durable growth where you’re being paid for the risk, rather than relying on multiple expansion or benign macro outcomes.” Dorian Carrell, Head of Multi-Asset Income
Conclusion
Generating reliable income in 2026 requires an active, research-driven approach that is forward looking rather than rooted in the past. Regardless of asset class, truly global and unconstrained approaches are required to maximise opportunities for diversification and access the full opportunity set.
Témy