MidLincoln October 2026 Fixed-Income Strategy

Strategy Interpretation - October 2026

Developed markets

Our DM model remains bifurcated. Australia and Israel screen as Overweights, backed by solid macro momentum and relatively better fiscal trends. By contrast, Germany, France, Belgium and Portugal stay in Underweight territory with weak momentum and deteriorating debt/fiscal metrics. Rising LOCAL and USD yields across key European names confirm that repricing is ongoing rather than completed.

We therefore hold DM duration broadly neutral but continue to fund EM and frontier Overweights from DM Europe credit and duration risk. The significant period sell-off in France, Germany and associated DM sovereign wideners argues against aggressively buying the dip until momentum stabilises.

Emerging markets

The EM model shows strong positive signals in Colombia, Egypt, Ghana and the Philippines, all rated Overweight, with support from growth and improving or manageable external positions. Hungary screens as Neutral/Watch despite decent macro scores, highlighting fragile momentum after strong prior-year performance. On the weak side, Bahrain and Jamaica remain Underweights, with balance sheet and external vulnerabilities weighing on scores.

USD-period data show Ghana and Egypt among the larger yield movers higher, underscoring the need for careful entry points and credit work even as the model supports Overweight stances. We favour a barbell of higher-quality carry (Colombia, Philippines) and more idiosyncratic reform stories (Egypt, Ghana), with position sizes calibrated to volatility.

Frontier markets

Frontier signals are distinctly pro-risk but require strong risk controls. Ukraine leads with a very strong Overweight score, reflecting improving macro and current-account metrics despite extreme geopolitical risk, followed by Democratic Republic of the Congo, Burkina Faso, Dominican Republic and Tanzania, all Overweight. Weakest are Azerbaijan (Underweight) and several Neutral/Watch Eastern European names with negative momentum and rising debt metrics.

Recent GEM sovereign watchlist data show Ukraine and Ghana bonds among the largest wideners, highlighting near-term mark-to-market risk in otherwise positively scored stories. We maintain Overweights but position Ukraine and Ghana as high beta within a diversified frontier sleeve, with strict stop-loss and liquidity criteria.

Sectors

Sector data show broad-based yield back-up last month, with higher-beta segments such as Real Estate, Reits, Energy and Owned No Guarantee experiencing some of the sharper moves. YTD, cyclical and transportation-linked sectors (Transportation, Communications, Insurance, Basic Industry) show the largest repricing.

We keep sector beta moderate: favour higher-quality public-sector risk (Agency, Supranational, Local Authority) for ballast against EM and frontier sovereign risk, and selectively add in Energy and Utilities where spreads compensate for macro and regulatory risks. We remain cautious on leveraged Real Estate and high-beta Communications credits that have already repriced but still face fundamental headwinds.

Last Month Model Review

Developed markets

Within DM, last month’s key explicit Underweight was Belgium. Subsequent performance validated this stance: Belgium’s latest month return was significantly negative, with further weakness YTD, while the model score deteriorated from -2.0 to -4.0, keeping it firmly Underweight. This confirms the model’s tendency to catch both deteriorating fiscal dynamics and momentum in weaker-core Europe.

Israel remained an Overweight and delivered a negative month, but still positive YTD, aligning with the model’s view that investors are being paid to tolerate episodic volatility in otherwise solid macro stories. The shift in broader DM yields suggests that our approach of funding EM risk out of weaker DM Europe rather than model-favoured DM names remains appropriate.

Emerging markets

Last month’s EM Overweight list (Mongolia, Qatar, United Arab Emirates, Israel, Jordan, Turkey) produced mixed but mostly negative one-month returns. Mongolia and Jordan underperformed and have since been downgraded to Neutral/Watch, illustrating the model’s responsiveness when momentum breaks. Qatar also moved to Neutral/Watch after negative month and YTD returns, trimming its risk contribution.

The United Arab Emirates retained Overweight status despite a negative month and modestly negative YTD, underlining that the model still favours its structural macro profile. Turkey’s prior Overweight also delivered a weak month and remains sensitive, leading to a downgrade to Neutral/Watch; this, combined with very high local yields and corporate wideners, reinforces a more tactical rather than structural approach to Turkish risk.

Frontier markets

Frontier Overweights in the prior baseline were concentrated in higher-beta names such as Mongolia and Jordan, which are now explicitly flagged as Neutral/Watch after posting negative latest-month returns. This illustrates that while the frontier sleeve can add carry, model Overweights do not shield portfolios from short-term drawdowns when global risk sentiment deteriorates.

Ukraine and Ghana, while not highlighted in last month’s frontier baseline, are now prominent Overweights and featured among this period’s largest yield wideners. We treat these as a continuation of the model’s willingness to lean into distressed or high-beta frontier sovereigns, but the recent price action confirms that such Overweights must be sized conservatively and paired with robust liquidity buffers.

Misses and underweights

The key Underweight in last month’s review, Belgium, delivered strongly negative returns over the next month, validating the defensive stance and providing effective funding for risk elsewhere. The model’s bearish stance on Belgium has intensified as fiscal and debt deltas worsened.

On the Overweight side, the largest negative outcomes were in Jordan, Turkey, Mongolia and Qatar, where next-month performance was negative and in some cases outpaced the broad EM sell-off. These results underline the importance of pairing model Overweights with active risk budgeting, granular credit selection, and willingness to cut exposure when momentum deteriorates, rather than mechanically scaling positions with score strength.

Developed Markets

Rates & sovereigns

Average DM yields have risen into October from already elevated levels, with LOCAL-period data showing higher yields in core names such as the United Kingdom, France, Switzerland, Sweden and the United States. USD YTD changes similarly indicate that yields in Germany, the United Kingdom, the United States and Canada have moved up substantially over the year.

The COUNTRY STANCE MODEL keeps Australia and Israel as DM Overweights, supported by better macro momentum and manageable debt dynamics, while Germany, France, Belgium and Portugal remain Underweights on weaker fiscal/debt trends and negative momentum. Japan is rated Neutral/Watch with particularly weak momentum, suggesting little reason to add duration despite still-low absolute yields.

We therefore keep overall DM duration close to benchmark but prefer: (1) mild long bias in Australia and Israel; (2) underweight positions in Germany, France, Belgium and Portugal, especially in the 7–15 year sector where term premia remain vulnerable; and (3) limited risk in Japan outside of very short tenors. Recent DM sovereign wideners in France confirm that European semi-core remains a key underweight funding source.

Credit

DM sovereign credit underperformance is concentrated in fiscally weaker Europe. France and Germany show both higher YTD USD yields and negative model scores, reinforcing a tilt away from their quasi-sovereign and local-authority risk in favour of better-scored DM such as Australia and Israel.

Corporate risk within DM-like jurisdictions (for example, Luxembourg issuers) features among GEM corporate wideners, with specific names displaying very high yields and large spread moves. This argues for security selection over broad beta exposure in cross-border DM/EM hybrid credits. We see room to hold investment-grade Agencies and Supranationals as liquid ballast while trimming high-beta DM-linked credit where fundamentals are not improving.

Implementation (model)

We implement the DM stance by tilting country weights according to the model and by differentiating duration and curve exposure across markets.

Duration: keep global DM duration near neutral, with small positive tilts in Australia and Israel offset by Underweights in Germany, France, Belgium and Portugal. Curve: favour mild flatteners in the United States and core Europe, reflecting still-inverted or flat curves and ongoing term-premium repricing. Risk controls: cap DM single-country exposures, especially in Underweight names, and avoid layering high-beta corporate risk on top of weak sovereigns.

Emerging Markets

Hard currency (USD)

Average sovereign GEM yields remain well above DM levels, and recent USD-period data highlight significant yield moves in Ghana, Ukraine and Egypt. USD YTD tables show large yield increases in Luxembourg, Senegal and several GCC-related names, pointing to stress pockets but also higher carry. EM model Overweights in USD space include Colombia, Egypt, Ghana and the Philippines, while Bahrain and Jamaica are Underweights.

Hard-currency sovereign wideners are concentrated in Ukraine and Ghana, with Ukraine bonds at very high yields across the curve. This supports the model’s high total score for Ukraine in frontier space but also underscores default/restructuring and geopolitical risk. GEM corporate wideners in Ghana, Turkey, Israel, Luxembourg and Brazil highlight where idiosyncratic risk has spiked, advocating a selective approach rather than broad HY beta.

We favour diversified exposure to Overweight sovereigns (Colombia, Egypt, Ghana, Philippines) via benchmark or near-benchmark issues, while remaining Underweight Bahrain and Jamaica. For Ukraine, we treat exposure as a small, high-conviction satellite within the frontier bucket rather than core EM hard currency.

Local currency

Local markets offer meaningful carry: Average Sovereign GEM Local Yields remain well above DM averages, with Turkey, Colombia, Brazil, South Africa and Mexico displaying double- or high single-digit LOCAL yields. The GEM local high-yield screen is dominated by Turkey, with YTWs in the mid-30% range across the curve, reflecting extremely tight domestic financial conditions and elevated inflation risk.

The EM model favours Colombia as an Overweight, supported by solid macro and momentum, and Hungary as Neutral/Watch with decent macro but softer technicals after strong prior performance. Period yield increases in Colombia local suggest short-term mark-to-market risk but also reinforce its attractiveness as carry once volatility is absorbed.

Implementation should distinguish between structural and tactical LC exposures: we prefer structural overweight in Colombia local, partial tactical allocations in Brazil and Mexico where yields are attractive but not flagged positively by the model, and very cautious, opportunistic trades in Turkey locals, tightly risk-managed and ideally funded with hedged positions or via options.

Implementation (model)

The EM model steers us toward a concentrated set of Overweight names with improved macro and momentum profiles, while flagging specific Underweights where external and fiscal metrics are deteriorating.

Duration: modestly long EM duration versus benchmark, skewed to Overweight names and kept shorter in Underweight or Neutral/Watch countries such as Bahrain, Thailand, Poland and the Czech Republic. Curve: favour belly exposure (5–10y) in higher-carry Overweights and avoid concentrated long-end exposure where liquidity is thin. FX hedging: keep FX hedges on in local markets with uncertain currency support (e.g., Turkey) but can run partial unhedged risk in better-balanced stories like Colombia and Mexico.

Frontier Markets

Market view

Frontier sovereigns offer the highest carry in the universe but remain the most sensitive to global risk sentiment and idiosyncratic shocks. The model’s strongest positive signals are Ukraine, Democratic Republic of the Congo, Burkina Faso, Dominican Republic and Tanzania, driven by strong or improving GDP growth, relatively contained debt ratios and, in some cases, better current-account dynamics.

However, watchlist data show that Ukraine bonds have recently widened sharply, and Ghana (though considered EM in the model set) also experienced significant spread widening. This underlines that model Overweights in frontier should be treated as high-beta exposures, particularly where conflicts, political uncertainty or restructuring risks are present.

On the weaker side, Azerbaijan is a clear Underweight with deteriorating external metrics and negative momentum, while Slovenia, Slovak Republic, Romania and Kazakhstan are Neutral/Watch due to negative momentum despite reasonable macro backdrops. These names are used as funding sources rather than active short positions, with exposure kept below benchmark where index-linked.

Implementation (model)

We structure the frontier allocation as a diversified sleeve with hard caps on single-name and regional risk. Overweights follow the COUNTRY STANCE MODEL but are scaled by liquidity and event risk.

We maintain Overweights in Ukraine, Democratic Republic of the Congo, Burkina Faso, Dominican Republic and Tanzania via benchmark or near-benchmark hard-currency lines, using tight position limits and clear exit rules. Ukraine is treated as a special-situation exposure, sized materially below model score would suggest, given the extreme geopolitical and restructuring uncertainty.

Underweights in Azerbaijan and other low-scoring Neutral/Watch names (Slovenia, Slovak Republic, Romania, Kazakhstan) are implemented by remaining below index weights and avoiding long-dated, illiquid issues. Duration across frontier is kept shorter than in EM, with limited long-end participation, and risk is controlled via aggregate frontier weight caps and scenario stress-testing for spread shocks.

Sectors

Market view

Sector data indicate a broad rise in yields last month, led by higher-beta areas such as Energy, Real Estate, Electric, Owned No Guarantee, Banking and Reits. YTD, Transportation and Communications have cheapened the most, followed by Insurance and several industrial sectors. This pattern is consistent with a late-cycle environment where risk premia are rebuilding across credit, especially in longer-duration or cyclically sensitive names.

We view defensive public-sector sectors (Cash and/or Derivatives, Agency, Supranational, Local Authority) as core holdings, given their relatively modest yield backup and role as liquidity anchors against EM and frontier sovereign risk. Energy and Utility sectors, despite higher volatility, still benefit from tangible asset backing and in many cases regulated or quasi-stable cash flows; we are comfortable maintaining moderate allocations here, focusing on stronger balance sheets and shorter tenors.

Conversely, we remain cautious on Real Estate and Reits where yields have risen sharply but structural headwinds (occupancy, refinancing risk, asset revaluation) persist. Communications and Transportation, despite large YTD repricing, are selective opportunities only, with emphasis on stronger operators rather than the sector beta.

Implementation (model)

Sector allocation is used to balance the country and duration risks derived from the COUNTRY STANCE MODEL. With elevated EM and frontier exposure, we tilt sector risk toward higher-quality and liquid instruments in DM and upper-grade EM corporates.

We overweight Agency and Supranational sectors as core liquidity and duration management tools, and hold Local Authority exposure preferentially in higher-scoring sovereigns while keeping it light in Underweight DM countries such as France, Germany, Belgium and Portugal. Banking sector exposure is kept moderate, with focus on well-capitalised institutions in stronger macro environments, and we avoid banks in jurisdictions showing large negative model scores or recent corporate wideners.

In high-beta sectors such as Energy, Basic Industry and Utilities, we implement exposure via diversified baskets and shorter tenors, avoiding names flagged in the GEM corporate wideners list, especially where yields have spiked on idiosyncratic risk. Duration is managed by concentrating sector risk in the 3–7 year area, limiting extension in structurally challenged sectors like Real Estate and Communications. Overall risk controls include sector caps aligned with benchmark plus tight issue-level limits for HY or distressed names.