The outlook for fixed income in 2026

Or should investors expect more surprises?

The reality is that it’s been more balanced than it has been for some time. Growth looks steady, inflation is easing and interest rates are likely to head lower – all of which help create a healthier backdrop for fixed income. But with governments still running large deficits and geopolitical risks never far from the headlines, it’s not a year to be complacent either.

Below, we break down the key themes that could shape bond markets in 2026, and what they might mean for investors.

A steady global economy, but in late‑cycle territory

The global economy looks set to keep expanding at a modest pace. Several forces are helping to support this:

US municipal bonds

Are munis poised to shine in 2026?

We believe the US municipal bond (muni) market is poised to break issuance records in 2026, driven by a wave of infrastructure projects and other public finance needs. This flood of new bonds, coupled with historically high yields not seen in years, is creating attractive opportunities for income-focused investors. Additionally, an easing interest rate environment – as the Federal Reserve (Fed) shifts to cutting rates – provides a tailwind: rising bond values and lower borrowing costs for leveraged funds.

Meanwhile, municipal credit fundamentals remain solid: state and local tax revenues are up, defaults are low, and overall credit quality is stable. Not all areas are equal, however. Bonds tied to unproven projects or issued by regions with declining populations face headwinds as those issuers struggle with heavier debt burdens.

On the other hand, sectors like affordable housing and senior living communities have performed well. Housing bonds offer elevated income with strong credit backing, while retirement community projects benefit from rising demand as the population ages.

With abundant supply, robust fundamentals, and supportive economic conditions, we believe munis appear well-positioned to deliver solid, tax-advantaged income in 2026 – rewarding investors who focus on quality and prudent sector selection.

Sovereign bonds

They’re back?

For much of the past decade, yields on government bonds such as Gilts, US Treasuries, and German Bunds were extremely low. Today, they are meaningfully higher – and for the first time in years, investors can earn a decent level of income from a traditionally lower risk asset class.

That’s a significant change. High‑quality government bonds are once again able to play their traditional role as a stabilizer in a portfolio. If markets become choppy or growth disappoints, they can provide valuable downside protection.

However, while interest rate cuts are likely, central banks are not expected to slash rates aggressively unless the economic outlook weakens sharply. This means government bond yields may move within a relatively narrow range during the year. Investors may benefit from keeping some interest rate exposure, but big bets either way may not be rewarded.

In the US, investors are watching the heavy volume of new Treasury issuance, as well as the appointment of a new Fed chair in May – both of which could influence longer‑term bond yields.

Corporate bonds

Quality counts more than ever

We believe corporate bond markets enter 2026 in solid shape. Most companies have coped reasonably well with the higher‑rate environment. Profit margins are stable; most balance sheets look healthy, and upcoming refinancing needs appear manageable.

Investor demand for investment‑grade (IG) bonds has been strong, helping to keep credit spreads – the extra yield offered over government bonds – at historically tight levels. Meanwhile, some companies are likely to issue more debt in 2026 to fund large‑scale investment in AI and new technologies.

The key point for investors is that spreads are already tight, so corporate bonds offer less of a cushion if economic conditions worsen. That makes security selection more important than simply owning the market.

Companies with reliable cash flows – for example, utilities or high‑quality financial firms – may continue to offer attractive risk‑adjusted returns. But more cyclical sectors could struggle if demand softens, and businesses facing higher funding costs or big investment needs may see returns come under pressure.

For income‑seekers, corporate bonds remain a core building block. But 2026 is a year where disciplined research and careful selection are likely to matter more than usual.

Emerging market debt

Attractive, but choose carefully

We believe emerging market (EM) bonds could provide some of the most compelling opportunities in 2026. Many EM central banks raised interest rates early in the cycle, and inflation in several countries is now falling. This has created an environment where local‑currency EM bonds can offer high real yields – something that stands out in the global fixed income universe.

Fiscal positions are improving in several markets, and investor inflows into the asset class have resumed following several tough years. In addition, US foreign‑policy actions in countries such as Argentina and Venezuela, and ceasefire efforts in Ukraine, have helped improve investor sentiment.

However, we believe EM investing always requires caution. Currencies can be volatile, global sentiment can shift quickly, and political uncertainty remains an ever‑present risk. For these reasons, 2026 is more likely to reward selective investing than broad exposure.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

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