U.S. bond investors could face a more challenging environment in 2026, as several market observers warn that returns may slow following an exceptionally strong year. Expectations that the Federal Reserve will reduce the pace of rate cuts, combined with the impact of potential fiscal stimulus, are reshaping the outlook after bonds delivered standout performance in 2025.
Bondholders benefited significantly in 2025 as monetary easing and a resilient U.S. economy drove the market’s best gains since 2020. With policy conditions set to change, investors are now assessing whether reduced support from the Fed and new fiscal measures could limit total returns in the year ahead.
The rally was fueled by a rate-cutting cycle in which the Fed lowered interest rates by 75 basis points in 2025. Falling policy rates pushed bond yields lower, boosting the value of existing bonds with higher coupons. At the same time, strong corporate earnings kept credit spreads tight, meaning investors required only a small premium to hold corporate bonds instead of U.S. Treasuries.
Total returns for the Morningstar US Core Bond TR YSD Index reached roughly 7.3% in 2025, marking the highest annual performance since 2020. The index tracks dollar-denominated government and investment-grade corporate bonds with maturities longer than one year.
While many analysts expect market conditions to remain broadly supportive in 2026, they caution that matching last year’s returns may prove difficult. Total returns, which reflect both income payments and price movements, could come under pressure if yields stop falling.
Markets are currently pricing in a smaller amount of easing next year, with expectations of around 60 basis points of Fed rate cuts in 2026. In addition, fiscal stimulus tied to tax and spending plans under U.S. President Donald Trump could boost economic growth, potentially keeping long-term Treasury yields from declining as much as they did in 2025.
Jimmy Chang, chief investment officer at the Rockefeller Global Family Office, said the outlook for next year is more complex. He noted that shorter-dated bond yields are likely to fall further if the Fed cuts rates again, but a re-accelerating economy could push longer-term yields higher, weighing on overall bond returns.
Duration concerns grow
Benchmark 10-year Treasury yields fell more than 40 basis points in 2025 to around 4.1%, supported by rate cuts and concerns about the U.S. labor market. Few market participants expect a similar move in 2026.
Analysts at JPMorgan project the 10-year yield will end 2026 near 4.35%, while strategists at BofA Securities forecast a level closer to 4.25%.
Anders Persson, chief investment officer and head of global fixed income at Nuveen, said rising government debt could pressure longer-dated bonds. As a result, he remains cautious on duration, maintaining a smaller allocation to bonds most sensitive to rising yields.
Credit spreads under scrutiny
Investment-grade credit spreads hovered near 80 basis points at the end of 2025, close to their lowest levels since 1998. Strong performance pushed total returns for high-quality corporate bonds to nearly 8%, according to the ICE BofA US Corporate Index. High-yield, or “junk,” bonds delivered returns of about 8.2%, roughly in line with the previous year.
Looking ahead, JPMorgan expects investment-grade spreads to widen toward 110 basis points in 2026, partly due to increased corporate borrowing, particularly from technology companies. Under that scenario, total returns for high-grade bonds could fall to around 3%.
Other institutions are more optimistic. BNP Paribas forecasts credit spreads remaining near current levels through the end of next year.
Emily Roland, co-chief investment strategist at Manulife John Hancock Investments, said she remains constructive on high-quality bonds. She expects economic growth to slow in 2026 and believes the Fed may ultimately cut rates more aggressively than markets currently anticipate.
According to Roland, the bond market may be underestimating the potential for weaker growth and disinflation next year, factors that could support another rally if they materialize.
