US bond investors could face a tougher 2026, with some market analysts forecasting slower yields as the Federal Reserve (Fed) scales back rate cuts and potential fiscal stimulus complicates the outlook after a banner year.
This cautious forecast follows a strong 2025 for bondholders, when Fed easing and a favorable economy fueled the market’s best performance since 2020. Investors are now assessing whether a less aggressive Fed and new fiscal policies could slow that momentum, posing a challenge to total returns.
A Fed cutting rates by 75 basis points in 2025 fueled this year’s bond rally, as lower policy rates put downward pressure on yields and boost the value of older bonds, with their comparatively higher payments. As for corporate debt, the resilience of the U.S. economy boosted corporate earnings, keeping the extra yield that investors demand to hold corporate bonds rather than U.S. Treasuries near record lows.
The total return of the Morningstar US Core Bond TR YSD index, which tracks dollar-denominated securities with maturities greater than one year, was around 7.3% in 2025, the highest since 2020. The index includes investment-grade government and corporate bonds.
Many expect market conditions to remain relatively similar in 2026, but total returns, which include bond payments and price fluctuations, could struggle to match 2025 performance.
The Federal Reserve is expected to cut interest rates by a smaller amount than in 2025, and traders were estimating, as of Monday, a relaxation of about 60 basis points in 2026.
Additionally, fiscal stimulus from President Donald Trump’s tax and spending policies, which are expected to boost economic growth in 2026, could prevent long-term Treasury yields from falling as much as they did this year, according to some investors.
“I think next year will be more complicated,” said Jimmy Chang, chief investment officer at Rockefeller Global Family Office.
“Short-term bond yields will continue to decline as the Fed will likely cut another one or two times, at a minimum. At the same time, a reviving economy could push long-term bond yields higher, which could negatively impact total returns,” he said.
Read more: Fed’s 2025 final minutes will shed light on political divisions
Doubts about the duration of the bonds
Benchmark 10-year Treasury yields — a key gauge of government and private sector funding costs — have fallen more than 40 basis points this year, to around 4.1% on Monday, as rate cuts and growing concerns about the U.S. labor market fueled the rally.
Few expect a repeat of the situation in 2026, with many market participants betting that the 10-year yield will remain at current levels or slightly above by the end of next year.
Analysts at JPMorgan forecast the 10-year Treasury yield will end 2026 at 4.35%, while rates analysts at BofA Securities forecast 4.25%.
Anders Persson, chief investment officer and head of global fixed income at Nuveen, said he expects the benchmark yield to decline to around 4%, but is cautious about long-term bond yields as rising global government debt levels could push those yields higher.
“We could see the long end (of the yield curve) remaining very anchored and potentially moving higher,” he said, adding that he remains “underweight in duration,” meaning he holds a smaller proportion of long-term bonds that would be more affected by rising yields.
Maximum credit spreads?
Investment grade credit spreads (or the premium on U.S. Treasuries that highly rated companies pay to issue bonds) were around 80 basis points on Monday, roughly the same level as at the beginning of the year and near their lowest level since 1998.
Total returns on investment-grade credit this year, as measured by the widely used ICE BofA US Corporate Index, stood at nearly 8% on Monday, up from 2.8% last year. The yield on so-called junk bonds, measured by the ICE BofA US High Yield Index, was around 8.2%, similar to last year.
JPMorgan forecast that investment-grade credit spreads could widen as high as 110 basis points next year, partly due to expectations of increased corporate debt issuance by technology companies, with total returns on high-grade debt falling to 3%.
Others are more optimistic. BNP Paribas forecasts spreads of 80 basis points by the end of next year.
Emily Roland, co-head of investment strategy at Manulife John Hancock Investments, was bullish on high-quality bonds through 2026, as she expects the economy to slow next year and the Fed to cut interest rates more aggressively than the market anticipates.
“The bond market is not detecting the disinflation or lower growth that we believe is coming for 2026,” he said. “In essence, we think bonds should be going higher.”
With information from Reuters
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