Global fixed income is going through an extraordinary period due to the simultaneity of reinforcing factors: an energy shock that has yet to stabilize, stickier-than-expected inflation, and private credit that has grown faster than the system can absorb. That is the diagnosis presented by Pilar Gómez-Bravo, Co-CIO of Fixed Income at MFS Investment Management, at a meeting with investors in Miami.
The executive shared a document titled “The Three Body Problem: A Pragmatic Approach to Investing in 2026,” which describes an environment of persistent volatility and rising risks. “Central banks, which were expected to diverge, are no longer going to do so. Basically, they are not going to do anything. And hopefully they won’t, because if they do, they could break the balance,” she explained.
The market environment, then, is marked by a common denominator: three forces colliding at the same time, generating a pattern of instability that is difficult to anticipate.
Energy: the shock that moves faster than monetary policy
The energy component is the most immediate and the most political. Gómez-Bravo reviewed the historical record: shocks of 139% during the invasion of Kuwait, 58% after the war in Ukraine, 28% in Syria, and a recent 79% linked to the escalation with Iran. While these episodes “tend to be short-lived,” their effects on inflation are immediate.
The sensitivity of the global market, she explained, is concentrated in a few geographies: Asia receives nearly 90% of the crude that flows through the Strait of Hormuz, and Europe remains highly dependent on gas. A prolonged shutdown would have uneven but profound consequences. “Trump may control the narrative, but Iran controls the physical supply of oil. If there is no physical supply, every day counts and it is difficult to control prices,” she emphasized.
The risk, she said, is that a supply shock derived from the conflict ends up turning into a growth shock. “If this lasts beyond four weeks, markets will begin to price in growth problems, not just inflation,” she warned.
Inflation: a much less linear slowdown
The second vertex is inflation persistence. Although some data show improvement, the pace of adjustment remains slow. In the United States, the short end of the curve is the only segment anticipating a stronger impact from the conflict, while the long end remains anchored.
The MFS expert’s presentation highlights that fiscal policy continues to be expansionary, with high deficits across all major developed economies. This is compounded by an unprecedented wave of corporate capex, driven by the artificial intelligence ecosystem and major digital infrastructure providers.
This massive investment push also has financial implications. Gómez-Bravo put it bluntly: “The problem arises the day they fail to meet earnings expectations and have to refinance all that debt.” She added a reflection that summarizes her view: “Why should I finance AI companies? Let shareholders do it—they are the ones who receive the upside.”
Today, she explained, the market is still absorbing record issuance without difficulty: hyperscalers could reach $400 billion in new debt this year, approximately half of net investment-grade supply. But the challenge lies not in the present, but in sustainability: “Today there is no problem—there is capacity to absorb all AI supply—but in two or three years there could be a financing problem.”
Private credit: rapid growth and early signs of stress
The third body in collision is private credit, whose growth has been so rapid that it is beginning to generate its own side effects. Global banks have increasing exposure to non-depository financial institutions, and several markets are showing patterns previously seen ahead of periods of stress.
Gómez-Bravo was clear in quantifying the risk: “If the default rate in private credit rises from 4% to 8%, and you only recover 50%, all illiquidity premiums disappear.” This potential deterioration coexists with other concerning factors:
- Easing of underwriting standards.
- Growth in PIK toggle structures, which capitalize interest instead of paying it.
- Increasing risk among private brokers financing hedge funds with leverage.
- 5% redemption limits in retail funds, which can amplify mass outflows.
Three lenses to analyze the cycle
The MFS presentation emphasized that current analysis must rely on three simultaneous pillars—fundamentals, valuations, and technicals—because none on its own provides a complete picture.
- Fundamentals: it is not just about inflation—it is fiscal policy, energy, and a credit constraint that “is already tightening financial conditions.” As Gómez-Bravo summarized: “It is the market that is doing the Fed’s job.”
- Valuations: spreads remain extremely tight relative to history, even after recent widening. For the firm, discipline is therefore key: defining clear thresholds. In Gómez-Bravo’s words: “Remember those thresholds to think about when to start adding risk… and thus maintain discipline.”
- Technicals: positioning is cautious, albeit heterogeneous. Dispersion remains contained, making security selection more relevant.
Where to look? The pragmatic approach of MFS
MFS’s strategy for the coming months combines flexibility with prudence:
- Neutral to slightly long duration in some markets.
- Tactical exposure in Brazil, Uruguay, Peru, Korea, and South Africa.
- Hedging of Latin American currencies “because they are the first to suffer.”
- Underweight in technology, except for specific names.
- Ongoing evaluation of opportunities in BDCs and industrial sectors with strong fundamentals.
“The advantage and disadvantage of fixed income is that it is mathematics: in the long term, if there are no defaults, yield is what you get,” the asset manager stated during her remarks. And a warning for investors seeking simplification: “This is a market for active managers, not for passive strategies that depend on stable trends.”
The three-body problem
The metaphor that gives the report its name is no coincidence. The system described by Gómez-Bravo—energy, inflation, private credit—functions like a three-body system: each movement affects the others, and the equilibrium is inherently unstable. The MFS manager summarizes it this way: “We are not facing independent shocks, but rather a dynamic system where moving one piece disrupts the rest.”
Nothing happening today appears definitive. Inflation is not yet defeated, private credit has not fully revealed its true risk profile, and the energy shock has not reached its floor. The underlying message—implicit throughout the Miami event—is to combine rigorous analysis with the ability to react: to understand that apparent stability is just that—apparent. And that as long as these three bodies continue to move, the investor’s task will be to navigate their dynamics without losing sight of the whole.
