MidLincoln Fixed-Income Strategy – Global Macro Credit Map

Strategy Interpretation - May 2026

Developed markets

DM curves have cheapened further over the period, led by USD and GBP. The United States and United Kingdom show higher USD yields over the period, and Canada is higher on both a period and YTD USD basis. Average DM yields around the mid‑3% area, compared with GEM sovereign and corporate yields near 6%, still look low on a relative basis.

The FOMC is signalling a slower hiking path but has not endorsed a clear cutting cycle; the Bank of England is similarly cautious. With DM sovereign wideners concentrated at the long end in the UK and Korea, and only modest tightening in New Zealand, we see more room for curve re‑steepening than a major duration rally. We keep aggregate DM duration underweight and prefer intermediate tenors where roll‑down is better protected from further repricing.

Emerging markets

EM hard‑currency yields remain well above DM, with several EM and frontier countries printing high single‑digit to double‑digit USD yields. YTD, countries such as Senegal, Germany (Euro credit), Luxembourg, and Moldova have seen sizeable yield increases, signalling both risk repricing and more attractive entry levels for carefully chosen credits.

Local EM markets show a sharper adjustment: Slovenia and Turkey stand out with very large period moves in local yields, and Turkey, Brazil, Colombia, and South Africa offer double‑digit or near‑double‑digit local yields. Average GEM local sovereign yields around 5.95 sit in line with GEM hard‑currency averages, but FX risk is the swing factor. Our stance is to prefer hard‑currency EM sovereigns for core beta and use local markets selectively where FX can be hedged or where real yields and policy credibility align.

Frontier markets

Frontier USD yields such as Senegal, Ukraine, Moldova, Kenya, and Ecuador remain elevated. YTD, Senegal and Moldova have widened materially, while the current‑yield table shows still‑very‑high levels despite some recent tightening in several names. The GEM sovereign watchlist reflects large tightening in Ukraine and Angola issues and notable widening in Sri Lanka and Pakistan paper.

This combination indicates a highly binary frontier landscape: distressed situations can deliver sharp spread compression, but the path is volatile and path‑dependent. We treat frontier as a source of idiosyncratic alpha rather than a structural overweight, with tight sizing, clear catalysts, and predefined exit levels.

Sectors

Sector dispersion has increased. Over the last month, high‑quality sectors such as Agency, Supranational, and Banking have seen modest yield tightening or only marginal moves, while Electric and Owned No Guarantee have cheapened on a period basis. YTD, Transportation and Technology have repriced sharply higher in yield, followed by Finance Companies and Capital Goods, pointing to cyclical and beta‑heavy sectors bearing the brunt of the adjustment.

We read this as an invitation to upgrade quality rather than chase yield in the most stressed sectors. High all‑in yields in Transportation and Technology may become interesting if fundamental weakening stabilizes, but for now we prefer carry in more defensive Financial Institutions, Insurance, and high‑quality quasi‑sovereigns.

Developed Markets

Rates & sovereigns

DM sovereigns continue to reprice higher in yield, particularly in USD and GBP. In USD terms, Canada, the United Kingdom, and the United States all show higher yields over the period, with Canada also higher YTD. The DM sovereign widener list is concentrated in long‑dated UK gilts and Korea paper, with 30‑year and 50‑year tenors in the UK and 30‑plus‑year tenors in Korea seeing 0.29–0.32 percentage point yield increases over the period.

On the other side, New Zealand and Singapore long bonds have modestly tightened. This divergence suggests that the global DM term premium is not moving in lockstep; markets are differentiating by policy credibility and inflation uncertainty. The FOMC’s and BOE’s cautious stance argues against a near‑term bull market in duration, while the BOJ’s yield‑curve control keeps JPY rates anchored and increases relative pressure on US, UK, and other DM curves to carry the adjustment.

We maintain an underweight in long DM duration, favor the 3–7‑year sector in USTs where the sub‑10‑year average yield of 4.04% offers acceptable carry versus risk, and selectively position for steepening in UK and Korea curves where long‑end yields have moved meaningfully.

Credit

Average DM yields around the mid‑3% area are still well below GEM sovereign and corporate yields close to 6%, limiting the absolute income contribution from DM credit. Within DM credit sectors, last‑month data show only small changes: Banking, Agency, Energy, and Supranational have seen modest tightening, while Electric and Industrial Other have cheapened.

YTD, beta‑sensitive sectors (Transportation, Technology, Finance Companies, Capital Goods) have experienced the largest yield rises, while Local Authority and Financial Institutions have adjusted more modestly. This pattern is consistent with a late‑cycle repricing: higher‑beta and growth‑sensitive sectors are being discounted more aggressively, while core financials and public‑sector credits remain relatively well anchored.

We keep DM credit at a neutral‑to‑slight‑underweight spread stance, preferring high‑quality financials and Agencies for defensive carry. We avoid extending too far down the DM quality spectrum given that the all‑in yield pick‑up relative to EM is limited while drawdown risk remains.

Implementation (model)

For DM in May 2026, we tilt the model portfolio as follows: short duration versus benchmark, mild curve steepener bias, and quality‑focused credit allocation. Implementation hinges on granular country selection and term structure controls.

Duration: keep portfolio DV01 10–20% below DM benchmarks, concentrated in the 3–7‑year bucket. Curve: implement 10s/30s steepeners in the UK and Korea via futures or swaps, with tight stop‑losses given central bank uncertainty. Credit: overweight Agencies, Supranationals, and core Financial Institutions; underweight cyclical and high‑beta sectors that have already repriced but could cheapen further in a growth slowdown.

Risk controls focus on capping DM long‑end exposure, stress‑testing for parallel and bear‑steepening shocks, and limiting single‑country overweight in the UK and Canada where policy risk is still elevated.

Emerging Markets

Hard currency (USD)

EM and frontier USD sovereigns continue to offer a significant yield premium relative to DM. The USD current‑yield snapshot shows countries like Senegal, Luxembourg, Ukraine, and Moldova printing double‑digit yields, while Kenya, Trinidad and Tobago, and Ecuador sit in the high single‑digit range. YTD, Senegal, Germany (Euro credit), Luxembourg, Canada, China, Bahrain, Moldova, the United Kingdom, the United Arab Emirates, and Kuwait have all seen yields rise, signalling a broad‑based repricing rather than a narrow idiosyncratic adjustment.

The GEM sovereign widener list flags Sri Lanka, Indonesia, Romania, and Pakistan as recent underperformers with yield moves in the 0.31–0.54 percentage point range over the period, while the tightener list highlights strong rallies in Ukraine, Angola, and Zambia, with yields falling by more than 1 percentage point in several cases. This mix of stress and recovery is typical of late‑cycle EM: distressed names can deliver outsized gains but are surrounded by elevated volatility.

We remain constructive on higher‑quality EM hard‑currency sovereigns and quasi‑sovereigns that have repriced higher YTD but still benefit from reasonable fundamentals. In contrast, we treat frontier exposures such as Ukraine, Angola, Zambia, Sri Lanka, and Pakistan as tactical, not strategic overweights. GEM corporate wideners in Singapore, Turkey, Mexico, and Brazil illustrate that corporate credit is also re‑distributing risk; we prefer diversified exposure via benchmarks and avoid concentrated single‑issuer bets in names experiencing double‑digit yield levels or extreme moves.

Local currency

Local EM curves have adjusted more violently than hard currency in several markets. Slovenia’s local yield is above 10% with an almost 5 percentage point period move, and Turkey’s local yield is above 35% with a sizeable period increase. Brazil, Colombia, Romania, South Africa, and Indonesia have all seen local yields rise over the period, with Brazil and Colombia now in the low‑ to mid‑teens and South Africa near 9%.

These levels underscore the carry opportunity but also highlight policy and FX risk. Turkey stands out on the GEM local high‑yield screen with multiple bonds yielding 32–39%; however, such yields reflect a combination of inflation, FX depreciation risk, and policy credibility concerns. Without a robust FX‑hedging framework and clear macro triggers, these cannot be treated as simple carry trades.

Our local strategy distinguishes between policy‑credible, high‑real‑yield markets and those where inflation and FX are unanchored. Brazil, Colombia, South Africa, and Indonesia fall into the former bucket, where selective duration and curve positions can be justified, particularly in intermediate tenors. Turkey and similarly unstable markets remain tactical trades only, sized small and preferably hedged for FX where instruments allow. We require either cheap, liquid FX hedges or strong local‑currency conviction before adding duration in such high‑beta markets.

Implementation (model)

In EM, the model portfolio separates core EM beta from higher‑risk frontier and distressed positions. We increase exposure to higher‑quality EM hard currency that has cheapened YTD and keep local‑currency risk concentrated in markets with credible central banks.

Duration: in EM hard currency, we are roughly duration‑neutral but shift exposure toward 5–10‑year maturities where yield pickup is meaningful relative to DM. In EM local, we allocate duration selectively, favouring steep curves with improving inflation dynamics and avoiding long‑end exposure in jurisdictions with unstable policy frameworks.

Curve: we prefer barbell structures in selected EM local markets (short cash plus 5–7‑year bonds) to capture carry and rolldown while limiting tail risk. In hard currency, we largely avoid ultra‑long tenors in distressed credits given binary restructuring outcomes.

Credit selection: we tilt away from recent GEM sovereign wideners without clear catalysts (e.g., Sri Lanka and Pakistan) toward names where widening looks more cyclical than structural. In corporates, large moves in Brazilian and Singaporean issuers argue for diversified exposure rather than concentrated bets.

Risk controls emphasize country and issuer limits, liquidity screens, and drawdown triggers. FX risk is controlled via partial or full hedges in markets with uncertain currency paths; where hedging is costly or unavailable, we demand a higher yield premium and reduce position size accordingly.

Frontier Markets

Market view

Frontier USD markets remain characterised by very high yields and large, discrete moves. The USD current‑yield list shows frontier or quasi‑frontier names such as Senegal, Ukraine, Moldova, Kenya, Trinidad and Tobago, and Ecuador at elevated levels; Senegal’s yield is in the high‑teens and Moldova above 12%. YTD, Senegal and Moldova have widened meaningfully, confirming that risk premia remain elevated despite some recent tightening in others.

The GEM sovereign tightener list highlights sharp rallies in Ukraine, Angola, and Zambia, all with yield drops exceeding 1 percentage point. This kind of price action reflects shifting default and restructuring probabilities rather than incremental macro data. While such moves can generate outsized returns, they are also prone to sudden reversals if negotiations stall or macro conditions deteriorate.

Our view is that frontier debt is still predominantly a trading, event‑driven space rather than a core carry allocation. We look for discrete catalysts (policy reforms, IMF engagement, restructuring milestones) and pre‑define exit levels. The signal across frontier is mixed: some names have already rallied hard (Ukraine, Angola, Zambia), while others continue to cheapen (Sri Lanka, Senegal), and the dispersion makes broad beta exposure unattractive.

Implementation (model)

We cap aggregate frontier exposure at a modest slice of overall EM risk budget, and we separate restructuring‑driven trades from higher‑yield but functioning credits.

Implementation guidelines:

• Size and limits: limit single‑name exposure in distressed credits such as Ukraine, Zambia, and Sri Lanka to small fractions of total portfolio NAV; aggregate frontier hard‑currency exposure capped relative to EM bench.
• Tenor management: avoid very long‑dated bonds in ongoing or likely restructurings; favour short‑ to mid‑maturities where recovery values and timelines are clearer.
• Take‑profit discipline: after large tightening moves (as seen in Ukraine and Angola issues), lock in gains rather than assuming a smooth path back to par.
• Liquidity screens: focus on benchmark‑sized, more liquid lines to control exit risk, especially during global risk‑off episodes.

Risk controls emphasize scenario analysis around restructuring outcomes and external shocks (commodity prices, geopolitics), and we avoid leverage on frontier positions to reduce tail‑risk amplification.

Sectors

Market view

Sector performance over the last month and YTD shows a clear rotation pattern. In the latest month, defensive or higher‑quality sectors such as Agency, Energy, Industrial Other, Brokerage/Asset Managers/Exchanges, Supranational, and Banking mostly saw modest yield tightening or limited moves, while Electric and Owned No Guarantee cheapened, indicating some sector‑specific repricing rather than broad market stress.

YTD, the picture is more pronounced: Transportation and Technology yields have moved sharply higher, followed by Finance Companies, Capital Goods, Insurance, Communications, Basic Industry, Consumer Non‑Cyclical, Local Authority, and Financial Institutions. This indicates that higher‑beta, growth‑oriented, and leveraged business models are bearing the brunt of the repricing. Average corporate GEM yields (5.99) and high‑yield GEM corporate yields (7.29) remain significantly above DM averages, supporting a selective risk‑on stance in EM corporate credit.

The signal across sectors is mixed: while some cyclical and high‑beta sectors now offer materially higher all‑in yields, the fundamental outlook has also deteriorated in places, and the repricing may not be complete if growth slows further. By contrast, Banking, Insurance, and other financial sectors provide relatively attractive yields for their risk profile and remain our preferred hunting ground for defensive carry.

Implementation (model)

Sector allocation is used to calibrate credit beta in both DM and EM books while preserving overall portfolio resilience.

Implementation focus:

• Defensive tilt: overweight Supranational, Agency, and high‑quality Banking and Insurance, which combine decent carry with modest period and YTD yield volatility.
• Selective cyclicals: maintain benchmark‑like or modest underweights in Transportation, Technology, and Finance Companies despite high YTD yield increases. Additional exposure is contingent on stabilising fundamentals rather than just higher yields.
• GEM corporates: use diversified exposure to GEM corporate indices to capture the roughly 6% average yield and 7.29% in high‑yield GEM corporates, while being cautious on names featuring in the widener list (e.g., certain Singapore, Turkey, Mexico, and Brazil issues with large yield jumps).
• Curve and capital structure: stay up the capital structure (senior, secured where possible) in cyclical sectors and avoid long‑dated subordinated instruments until volatility subsides.

Risk controls include sector caps, minimum quality thresholds for core holdings, and sensitivity analysis to both spread‑widening and rate‑shock scenarios. We avoid concentration in any single high‑beta sector and pair higher‑yielding holdings with liquid, high‑quality sector exposure to maintain portfolio liquidity and optionality.