This week we spoke with Dr Christian Baylis of Fortlake Asset Management, someone we regularly check in with given his background and Fortlake’s broad mandate across the bond universe as an alternative manager. In short, he sees some value in duration, though the outlook is nuanced, particularly in the U.S., and credit spreads remain tight. Intriguingly, it is this environment that is leading Fortlake into more esoteric areas of the bond market, where there may be upside as a potential default cycle begins to emerge.  That means he doesn’t have too many dogs in the same race as our multi-asset portfolios and provides an interesting perspective. 

Australian Duration: Now Getting Paid to Wait

Australian government bonds have become notably more attractive over recent months. Following stronger-than-expected inflation data, the yield curve has steepened, meaning investors are now compensated with a meaningful term premium for extending duration. With the front end of the curve sitting above the 3.6% cash rate, there's genuine carry on offer.

The key for Christian, however, is framing duration as a source of income and portfolio ballast rather than a speculative rate bet. In the current environment of elevated macro uncertainty, trying to time interest rate movements is fraught with risk. Buying duration for accrual and carry purposes allows investors to collect yield while retaining optionality should a risk event materialise. Think of it as getting paid to hold insurance.

The U.S.: A More Complicated Picture

American duration presents a different proposition entirely. The Federal Reserve's influence appears increasingly confined to the front end of the curve—roughly two years and shorter—while the long end responds to market forces that include persistent fiscal deficits, inflation concerns, and growing questions around central bank independence.

Most developed economies are now reversing course on rate cuts, yet the U.S. remains an outlier in signalling further easing. The market appears sceptical, and there's a reasonable argument that U.S. long-end rates deserve a higher term premium to compensate for these structural uncertainties. For Australian investors weighing local versus U.S. duration, the domestic market offers more predictable fundamentals and cleaner carry dynamics. We are increasingly inclined to agree. 

A New Regime for Rates

Perhaps the most important structural point that Christian makes (and one that many mortgagees may need to heed) is that we may be entering an era of "higher lows" for cash rates. The extraordinary monetary accommodation of recent decades—zero rates, massive quantitative easing—is unlikely to return absent a severe crisis. Residual liquidity from over $30 trillion in money printing, combined with persistent fiscal deficits globally, suggests both inflation and interest rates will settle at structurally higher levels than pre-pandemic norms.

Credit: Quality Matters More Than Ever

Credit markets tell a bifurcated story. Investment grade credit remains well supported, with strong issuance and healthy demand. However, the leveraged loan market—particularly double-B and triple-C rated credits—shows mounting stress which may be the credit in the credit coal mine. Chapter 11 filings in the U.S. are running at record levels, and distressed debt trading below 70 cents on the dollar is increasing at a concerning velocity.

Recovery rates on defaults are also proving disappointing, as many stressed borrowers carry balance sheets heavy on intangibles and goodwill rather than hard assets. This argues for maintaining exposure to higher-quality credit while being cautious about reaching for yield in riskier segments.

Finding Genuine Diversification

For investors seeking diversification beyond traditional beta, idiosyncratic opportunities exist, particularly on the short side of distressed credit where careful security selection can add meaningful value which is where Fortlake and their current focus can play a valuable role and provide (we think) much needed diversification given tight credit spreads and an uncertain outlook for government rates.  

The overarching message that we took from the conversation: in 2026, getting paid to hold quality assets beats speculating on rate movements, and genuine diversification requires looking beyond conventional allocations.