5 top trends for income investors in New Financial Year
Market volatility creating opportunities in corporate bonds.
Forget the “two-speed” economy. In FY26, the global economy could have multiple gears with growth diverging sharply across countries and sectors.
President Trump’s tariff agenda may stall some sectors, accelerate others, and leave some in limbo as a new global trade regime takes shape.
For income investors, persistent volatility in corporate bond markets in FY26 could create potential long-term opportunity as investor fear distorts bond pricing.
Capturing this value will require an active approach. More than ever, investors need to pinpoint undervalued assets, separating winners from losers.
Potential rewards are compelling. PM Capital has used recent market volatility to add corporate bonds yielding above 5.5% to its Enhanced Yield Fund. These bonds are issued by high-quality companies.
Chosen well, global corporate bonds can potentially provide an attractive risk-adjusted return for income investors in FY26 - especially as term deposit rates fall as interest rates are cut, equity dividends potentially edge lower and bank hybrids are gradually phased out.
Here are five trends shaping our investment strategy in global corporate bonds for FY26:
1. Tariffs and inflation
We are closely watching the impact of higher tariffs on long-term inflation expectations and thus global interest rates and bond yields.
Although inflation in advanced economies has generally moderated this year1, the risk of an inflation breakout due to higher tariffs remains elevated.
Greater divergence in inflation across economies is another possibility if exporters redirect more products away from the US. Prices in Europe, for example, could face greater downward pressure if Asian manufacturers redirect more product from the US to European markets.
2. Tariffs and employment
How companies and consumers respond to higher tariffs will help define the global economy and markets in FY26.
Employment data is critical. Although US employment levels have broadly remained resilient this year2, the effects of tariffs on business investment and hiring are yet to be felt fully. New US immigration policies are another labour-market wildcard.
Also possible is employment data masking stagnant labour markets. Fewer migrant workers in the US could potentially reduce its labour supply, creating an illusion of labour-market strength, even though job creation is sluggish.
If tariff-affected companies are forced to shed more staff in FY26, unemployment may likely rise and consumers will have less capacity to withstand higher prices.
Given these risks, PM Capital’s Enhanced Yield Fund has preferred bonds issued by companies that rely less on consumer discretionary spending, and are more insulated from trade and economic shocks.
3. Infrastructure
Bonds issued by infrastructure companies with strong market positions and resilient earnings could be increasingly attractive for income investors in FY26, amid rising macroeconomic and geopolitial risks.
The Enhanced Yield Fund this year took advantage of volatility in corporate bonds to add or increase positions from high-quality issuers such as Qube Holdings, Melbourne Airport, Auckland International Airport and the Australian Securities Exchange.
We expect more opportunities to invest in bonds from infrastructure companies in FY26, adding yields just below 6%, in some cases, to our portfolio.
We also see emerging value in credit from manufacturers that supply components to leading infrastructure companies. So, too, businesses that rely more on domestic rather than international manufacturing – and are less exposed to global supply-chain risks.
4. Defence
Corporate bonds issued by global defence companies are another focus for the Enhanced Yield Fund in FY26.
As the US requires its allies to boost defence spending, defence companies could benefit from a massive increase in military spending this decade.
The rearmament of Europe and other US allies could lead to more bond issuance from defence contractors, and growing investor interest in defence companies that secure long-term defence contracts from governments worldwide.
So far, most interest in defence companies this year has been in equities. Less considered is the growing appeal of defence-contractor bonds.
5. Global banks
Global banks have been a key theme for PM Capital this decade, in equities and debt. We believed markets over-reacted to challenges facing European and US banks during the COVID-19 pandemic in 2020, creating compelling valuations.
The Enhanced Yield Fund this year increased its position in bonds issued by Lloyds Banking Group Plc in the UK, and HSBC in Hong Kong.
European bank bonds could offer compelling opportunities in FY26, as the region stands to benefit from geopolitical shifts. A Trump-led trade war may prompt Chinese manufacturers to deepen ties with Europe, while global investors could reallocate capital away from the US in search of stability and value in Europe.
Conclusion
Successful income investing in FY26 requires a difficult balancing act. Through an active approach, investors will need to pounce when short-term market volatity and fear distort valuations in corporate bonds.
Equally, income investors will need capital-preservation strategies to safeguard against volatility and the potential for larger drawdowns in returns.
On that score, the Enhanced Yield has capital available to take advantage of emerging opportunities in corporate bonds.
On capital preservation, the Fund has almost no exposure to fixed-interest duration, having moved to floating rates, which is designed to help protect investor capital if an inflation outbreak returns and interest rates rise.
Whatever happens, some things are possible in FY26: occasional bouts of high market volatility; more opportunity for patient, long-term income investors; and greater need to use active strategies with interest rate securities.
More information on the Enhanced Yield Fund is available here.
1 International Monetary Fund, ‘IMF Data Mapper: Inflation”. Accessed 18 July 2025.
2 Federal Reserve Bank of St Louis, ‘Unemployment Rate’. At June 2025.
Disclaimer:
This insight has been prepared by PM Capital Limited (ABN 69 083 644 731, AFSL No. 230222) as responsible entity and investment manager of the PM Capital Enhanced Yield Fund (ARSN 099 581 558) (‘Fund’).
The information contained in this insight is for Fund investor use only. The views expressed herein are part of a wider fund investment strategy and should not be considered in isolation. It is general information only and is not intended to provide you with financial advice, and does not (and does not intend to) contain a recommendation or opinion which is intended to be investment advice or personal advice
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