MidLincoln September 2026 Fixed-Income Strategy

Strategy Interpretation - September 2026

Developed markets

DM yields have moved higher over the period, with the COUNTRY STANCE MODEL signalling clear differentiation. Australia and Israel remain strong Overweights on improving macro and solid momentum, while core euro markets (Germany, France, Belgium, Portugal) sit in Neutral/Underweight territory despite modest local yield back-up. Japan screens as a weak Neutral/Watch with negative momentum.

We use this dispersion to keep overall DM duration close to benchmark but skew country weights: overweight Australia and Israel for carry and curve roll-down, underweight Belgium, and remain cautious in Germany and France despite higher local yields. In Japan, we keep risk light and largely use it as a funding market for higher-conviction DM and EM positions.

Emerging markets

Average sovereign GEM yields remain meaningfully above DM yields, and the model’s strongest signals cluster in EM. Egypt, Ghana and Colombia remain clear Overweights with strong macro and supportive momentum, while the Philippines offers high macro quality but weaker recent price action. Thailand and Bahrain sit at the weak end of the EM spectrum but are only rated Neutral/Watch, signalling that outright shorts are not yet warranted.

We continue to express EM risk primarily via hard currency sovereigns and selectively via local curves where macro is improving and FX risk is either hedged or structurally supported. The mix of high carry and positive model scores makes EM the main source of incremental yield in the portfolio, but we avoid extrapolating YTD outperformance, especially where bond YTD returns are already strong (Ghana, Colombia, Trinidad and Tobago).

Frontier markets

Frontier valuations remain extreme in pockets, with very high USD yields (Luxembourg, Senegal, Ukraine) and outsized local yields (Turkey). The COUNTRY STANCE MODEL is constructive on several frontier names: Ukraine and Argentina screen as Overweights alongside Serbia and Jordan, while Kuwait, Kazakhstan, Oman, Nigeria and Romania remain Neutral/Watch.

We keep a clear distinction between model Overweights with improving macro (Serbia, Jordan) and more event-driven Overweights (Ukraine, Argentina). The former can occupy a more stable frontier bucket; the latter should be treated as opportunistic with hard position and loss limits. Frontier allocation remains capped, with an emphasis on diversification across multiple names rather than concentrated binary exposure.

Sectors

Spread behaviour across sectors is increasingly idiosyncratic. YTD, Communications and Transportation yields have moved sharply higher, while Insurance, Capital Goods and Technology have also cheapened. Over the last month, more defensive rate-linked sectors such as Agencies, Supranationals and Local Authorities have seen only marginal yield moves, offering ballast against higher-beta risk.

We tilt sector allocation toward higher-quality rate and quasi-sovereign sectors for our liquidity core, add carry via selectively cheapened cyclical sectors (Basic Industry, Capital Goods, Insurance), and use high-beta segments (Communications, Transportation, REITs) in a constrained, tactical sleeve. Duration is kept close to the benchmark within sectors, with credit beta doing most of the work.

Last Month Model Review

Performance of prior Overweights

The review baseline shows that the model’s August Overweight calls performed well over the subsequent month. Australia delivered a 3.8% monthly return with YTD at 12.3%, justifying the model’s upgrade in total score from 6.0 to 7.0 and the continued Overweight. EM Overweights Ghana (2.0% month, 25.4% YTD), Colombia (1.4% month, 16.8% YTD) and Egypt (1.3% month, 1.8% YTD) all outperformed broad EM beta, reinforcing the tilt toward high-macro-score EM sovereigns.

Israel, another DM Overweight, also generated a positive 1.2% monthly return and 5.0% YTD, supporting its increased total score and persistent Overweight. The United Arab Emirates, an EM Overweight with a lower total score, delivered a 1.0% monthly return but only 0.6% YTD, underlining that not all Overweights warrant equal sizing and that macro quality and momentum both matter for conviction.

Underweight validation

Belgium, flagged as an Underweight last month with a negative total score, posted a modest 0.6% monthly return and remains negative YTD at -2.0%. The persistence of its weak macro profile (notably the high debt delta) and poor YTD performance support the ongoing Underweight and the use of core euro markets as partial funding for higher-conviction DM and EM exposures.

Developed Markets

Rates & sovereigns

Average DM yields have risen to levels clearly above the recent past, but still sit below Average UST yields for sub-10-year maturities, preserving some relative value in non-US DM curves. LOCAL PERIOD CHANGE data shows yields grinding higher across core Europe (Germany, France, Belgium, Portugal, Slovak Republic) and Japan, while local yields in high-debt peripherals have also edged up. The COUNTRY STANCE MODEL nevertheless points to clear differentiation:

• Overweights: Australia and Israel, both with total scores of 7.0 and positive macro and momentum components.
• Underweight: Belgium, with negative macro and high debt delta driving a total score of -2.0.
• Neutrals/Watch: Switzerland, Canada, United States, Germany, France, Portugal and Japan, where signals are mixed or modestly negative.

Strategically we keep DM duration near neutral, but tilt country allocation. The FOMC’s cautious stance argues against materially extending duration in US Treasuries; instead, we overweight Australia and Israel for incremental carry and cross-market diversification and use Belgium as a primary DM underweight. Japan’s negative momentum and ultra-loose policy stance call for underweighting duration relative to other DMs, particularly in the belly and long end where any policy re-pricing would be felt most.

Credit

DM sovereign spreads remain relatively well anchored, but there is a subtle divergence between stronger macro credits (Australia, Israel, Switzerland) and weaker peripherals (Belgium, to some extent France and Portugal). The DM sovereign tightener list is dominated by Israel, matching the model’s Overweight and validating the structural long stance there.

We maintain moderate DM credit beta, favouring higher-quality sovereign and quasi-sovereign issuers as collateral against EM and frontier risk. Belgium remains a structural underweight within DM credit allocations, given its weak macro score and negative YTD returns. Canada and Switzerland, both Neutral/Watch, can provide balanced duration and liquidity without a strong directional credit view.

Implementation (model)

We implement DM views via relative-value positioning aligned with the COUNTRY STANCE MODEL:

Duration: neutral overall versus a DM benchmark, with mildly short exposure in Japan and Belgium and neutral in the US. Curve: favour mild flatteners in Australia and Israel (overweight 5–10Y, underweight ultra-long) and keep core Europe exposures in the belly where roll-down remains attractive but long-end volatility is limited.

Risk controls: cap individual DM sovereign deviations at tight bands versus benchmark, maintain a maximum aggregate DM underweight in any single currency bloc, and avoid concentrated duration bets around single central bank meetings.

Emerging Markets

Hard currency (USD)

Average Sovereign GEM Yields at 6.27 continue to offer a clear premium to Average DM Yields at 3.72. Within this, the COUNTRY STANCE MODEL points to a cluster of high-conviction Overweights:

• Egypt: Highest EM total score (8.0), very strong macro component (6.0) and positive momentum. This is a core EM hard-currency Overweight.
• Ghana: Total score 7.0 with strong momentum and high YTD returns (25.4). The bond rally argues for careful scaling, but the signal remains positive.
• Colombia: Total score 6.0, balanced macro and momentum, strong YTD returns (16.8) and positive month (1.4).
• Philippines: Total score 6.0, top-tier macro but flat momentum, signalling a medium-term carry and quality play.
• Hungary: High total score (6.0) but only Neutral/Watch, indicating a constructive but not yet Overweight stance.

USD PERIOD CHANGE highlights significant yield moves in frontier and EM names such as Luxembourg, Senegal, Ukraine and Bolivia, but these are not core EM model names and we treat them as tactical only. GEM SOVEREIGN WIDENERS show stress in Senegal, Ukraine and Argentina; GEM SOVEREIGN TIGHTENERS highlight Ghana and Egypt, which dovetails with their model Overweights and validates their recent performance.

Implementation focuses on overweighting Egypt, Ghana and Colombia hard-currency curves in the 3–10Y segment, adding Philippines selectively for quality, and expressing caution on weaker macro or Neutral/Watch names such as Bahrain and Thailand.

Local currency

Average Sovereign GEM Local Yields at 5.92 remain attractive relative to DM, and LOCAL CURRENT YIELD LEVELS highlight substantial yields in EM local markets such as Turkey, Brazil, Colombia, South Africa and Mexico. The GEM LOCAL HIGH-YIELD SCREEN is dominated by Turkey with very high YTWs (above 32), but Turkey is only Neutral/Watch in the EM model and sits at the high end of local risk.

We prefer to take local duration in model Overweight macro names rather than purely chasing yield. Colombia stands out, with local yields above 12 and a strong EM Overweight signal; this makes it a key local-currency allocation, with FX exposure taken selectively or hedged depending on the base currency of the investor. For Egypt and Philippines, we would generally favour hard-currency exposure initially, adding local only where FX hedging is feasible and cost-effective.

Implementation: overweight Colombia local in the 3–7Y part of the curve, neutral to small long in Mexico and South Africa where yields are elevated but not extreme, and keep Turkey as a small, high-risk satellite position given very high yields and macro uncertainty, strictly capped in risk budgets.

Implementation (model)

The COUNTRY STANCE MODEL is the primary driver of EM allocation. Current EM scores and stances suggest:

• Core Overweights: Egypt (Overweight, 8.0), Ghana (Overweight, 7.0), Colombia (Overweight, 6.0), Philippines (Overweight, 6.0).
• Constructive but smaller positions: Hungary (Neutral/Watch, 6.0), reflecting strong momentum but incomplete macro improvement.
• Underweight/avoid for now: no explicit EM Underweights, but weaker Neutrals (Thailand, Bahrain, Trinidad and Tobago, Poland, Czech Republic) warrant cautious or benchmark-weight exposure.

Duration: modestly long in Egypt and Colombia hard-currency curves, focusing on the belly; neutral to slightly short in markets with weaker macro signals or stretched YTD returns (Thailand, Bahrain). Curve: prefer 3–10Y segments for roll-down and liquidity, avoid long-end concentration in lower-rated names.

FX: where local is used (Colombia, South Africa, Mexico), we separate duration from FX by employing partial or full hedges based on investor mandate and hedge cost. Turkey local is treated as a high-yield tactical trade with explicit FX stop-loss.

Risk controls: set maximum country-level EM exposure, cap aggregate EM hard-plus-local allocation, and limit high-beta names (Ghana, Trinidad and Tobago) within a dedicated risk sleeve. GEM CORPORATE WIDENERS (India, Kuwait, Luxembourg, Peru, Brazil) are used only in limited size and after credit work, with strict loss triggers and position concentration limits.

Frontier Markets

Market view

Frontier markets continue to display wide dispersion in yields and fundamentals. The COUNTRY STANCE MODEL identifies several Overweights:

• Ukraine: Overweight, total score 7.0, strong macro improvements but negative recent bond month (-3.8). GEM SOVEREIGN WIDENERS show significant yield spikes across Ukraine bonds, underscoring event risk.
• Argentina: Overweight, total score 6.0, with improving momentum but also among wideners in USD space.
• Serbia and Jordan: Overweights with solid macro scores and modest positive bond returns, offering more stable frontier carry.

Neutral/Watch frontier names (Romania, Kuwait, Kazakhstan, Oman, Nigeria) show more moderate total scores (1–3) and lower YTD returns, pointing to a lower-risk but also lower-compensation profile compared with the high-beta Overweights. USD CURRENT YIELD LEVELS for Luxemburg and Senegal highlight frontier valuations, but these countries are not in the model set and thus remain off the core recommended list.

Implementation (model)

We split frontier into two buckets: (1) macro-resilient carry plays (Serbia, Jordan) and (2) event-driven high-beta trades (Ukraine, Argentina). Serbia and Jordan can be used as the core of frontier exposure via the 3–7Y segment, where liquidity is usually better and duration risk is manageable. Ukraine and Argentina are sized as small, high-conviction trades with tight stop-losses and clearly defined exit triggers based on both price action and macro or policy news.

Duration: keep frontier duration short to neutral, avoiding long-dated bonds where recovery value and restructuring risk are hardest to price. Curve: focus on the belly and short end; avoid illiquid ultra-long issues. Risk controls: limit aggregate frontier to a modest share of total fixed-income risk, cap any single frontier Overweight at a low percentage of NAV, and monitor GEM SOVEREIGN WIDENERS and TIGHTENERS for early signs of stress or normalization.

Sectors

Market view

Sector data show a clear divergence between defensive, rate-sensitive sectors and higher-beta corporate sectors:

• Defensive / rate-linked: Cash and/or Derivatives, Agency, Supranational, and Local Authority have low-to-mid-6% yields and minimal period yield changes, anchoring portfolio liquidity and duration.
• Intermediate beta: Energy, Electric, Industrial Other, Consumer Cyclical and Finance-related sectors offer yields in the mid-6% to high-7% range with modest period moves.
• High beta: Communications and Transportation show double-digit AverageYTM and sizeable YTD yield increases, signalling both opportunity and risk.

YTD, Local Authority has cheapened somewhat, and Financial Institutions, Insurance and Capital Goods have also seen yields move higher. This supports gradual rotation from ultra-defensive into select cyclical and financial sectors where credit metrics remain sound but valuations have adjusted.

Implementation (model)

Sector allocation is used to calibrate credit beta and liquidity around the COUNTRY STANCE MODEL’s country views:

• Core ballast: maintain a strategic allocation to Cash and/or Derivatives, Agencies, Supranationals and Local Authorities to anchor duration and provide liquidity, especially against EM and frontier exposures.
• Carry sleeve: add exposure to Industrial Other, Basic Industry, Capital Goods, Finance Companies, Utility and Insurance where YTD cheapening has lifted yields. Position sizing should reflect underlying country risk from the model (e.g., favour Colombia, Egypt, Philippines-linked credits where sovereign stance is Overweight).
• High-beta tactical sleeve: use Communications, Transportation and select REITs in small sizes for upside participation, with tight spread and price risk limits.

GEM CORPORATE WIDENERS (India, Kuwait, Luxembourg, Peru, Brazil) are best treated as idiosyncratic, distressed or special-situation positions. We recommend only limited, research-driven allocations there, sized well below core sovereign and high-quality corporate holdings. Risk controls focus on sector concentration caps, issuer and group limits, and explicit maximum allocation to high-yield GEM corporates consistent with investor risk appetite.