2026 Global Fixed Income Outlook
Second Quarter
Key Takeaways
While new uncertainties arise and familiar ones continue, our optimistic outlook and focus on proactive, opportunistic fixed-income management stay strong.
We expect the Federal Reserve (Fed) to refocus on inflation, especially as the central bank welcomes a new chair determined to stabilize prices through productivity gains.
With the U.S. Supreme Court’s recent tariff ruling, trade policy is back in the spotlight. But in terms of the economic impact, not much has changed.
Amid the whirlwind of news in early 2026, our views on the economic landscape and fixed-income opportunities remain largely unchanged. Of course, the launch of combat operations in Iran will be a significant driver of market uncertainty and volatility in the months ahead. But so far, nothing has shaken our generally positive views on the U.S. economy and actively managed fixed-income strategies.
What a New Fed Chair Could Mean for Fed Policy
Months of speculation ended in late January, when President Donald Trump nominated Kevin Warsh as the next Fed chair, a somewhat surprising pick. Along with serving on the Fed’s Board of Governors (2006 to 2011), Warsh boasts considerable experience in economic policy and the financial sector. Compared with the current central bank, Warsh favors a more restrained approach focused on clear-cut rules that foster Fed independence.
Regarding the Fed’s dual mandate of promoting price stability and full employment, Warsh believes price stability should dominate. In his view, full employment depends on sustained price stability, and without it, the Fed fails in its other responsibilities.
Warsh also has a reputation as a monetary policy hawk, which seems to conflict with Trump’s well-known desire for lower rates. However, his hawkish views largely pertain to the Fed’s balance sheet.
He believes prolonged quantitative easing, like we’ve experienced for the last several years, enables fiscal excess and effectively finances debt. Warsh argues the Fed should force fiscal discipline by refusing to accommodate deficits.
Regarding interest rates, Warsh believes productivity gains will fuel economic growth without sparking inflation, allowing rates to decline. He prefers a slow, more conditional approach to rate cuts.
How Warsh’s Views Could Influence Bond Yields and Credit
Under a Warsh-led Fed, we expect more correlation between the central bank and the U.S. Treasury Department. Like Warsh, Treasury Secretary Scott Bessent’s pro-growth agenda favors fewer federal regulations, lower interest rates and a smaller Fed balance sheet.
We believe these goals could help strengthen the housing market, a key initiative of the Trump administration. They would also help make mortgage-backed bonds more attractive. Additionally, banking deregulation could fuel credit expansion, highlighting opportunities among corporate bonds.
Furthermore, Warsh’s philosophy should promote continued U.S. dollar strength. His focus on constraining inflation and reducing the Fed’s balance sheet should support real yields and lift the dollar versus other currencies. It could also put to rest the lingering — and in our view, unfounded — concerns about the dollar losing its global reserve status.
What U.S. Tariff Policy Changes Could Mean for the Economy
Along with the Fed announcement, U.S. tariff policy has recaptured investors’ attention. In a widely anticipated ruling, the U.S. Supreme Court in mid-February canceled the president’s emergency powers-imposed tariffs. The decision calls into question the nearly $200 billion the U.S. Treasury has collected since those tariffs took effect in April 2025.
The administration responded to the ruling with a 15% global tariff under a provision of the Trade Act of 1974. These tariffs can only last up to 150 days, but the government could replace them with more targeted measures later in the year.
We expect minimal economic impact from the tariff changes, though trade uncertainty remains elevated. Because the global tariff is temporary and likely to evolve, it doesn’t alter our economic, market and interest rate forecasts.
Furthermore, companies have shown resilience in navigating tariffs and managing their bottom lines. Investors may benefit slightly from a reduction in legal uncertainty now that the Supreme Court has issued its decision.
Active Fixed-Income Approach: A Framework for Changing Conditions
We believe an active, opportunistic approach to fixed-income investing may help investors manage a range of changing economic, market and political forces.
For example, our research suggests actively adjusting duration, yield curve and credit risk exposure are prudent strategies. Additionally, making tactical, timely and informed allocations to higher-income or underfollowed sectors may enhance investors’ longer-term performance potential.
U.S. Government Bonds
We expect the yield curve to continue steepening. Fed policy should keep short-maturity Treasury yields steady near 3.5%, while inflation and federal debt worries may support longer-maturity yields above 4%.
We still believe select government bonds outside the U.S. offer attractive value versus U.S. Treasuries, particularly in the U.K., Australia and New Zealand. Higher yields and weaker economic outlooks in these countries give central banks more room to cut rates, thereby boosting total return potential.
U.S. Securitized Assets
We continue to favor investment-grade securities with shorter durations and structural protections. Given the Trump administration’s focus on housing affordability, we expect to remain tactical in terms of our mortgage-backed securities (MBS) trading.
Elsewhere, we remain selective, particularly regarding exposure to artificial intelligence (AI)-related credit. We have avoided asset-backed securities (ABS) backed by loans with SaaS (software as a service) exposure. We have some exposure to hyperscaler data center ABS, but we’re not ready to pick winners and losers in the AI race and await better opportunities.
Municipal Bonds
The muni market’s strong start to 2026 reinforces our view that munis’ relatively high quality and longer durations remain attractive for investors looking to reallocate cash. Near-term technical factors and tax season dynamics may temporarily slow demand, but we believe residual inflows and cash on the sidelines should provide a cushion.
Municipal credit fundamentals should normalize amid slower revenue growth and limited federal support, but we believe strong reserves and fund balances offer meaningful financial flexibility. Valuations are tight, yet we are finding select opportunities in the development district, multifamily housing, prepaid energy and retirement community sectors.
We remain more cautious in the state and local government (including school districts) and mass transportation sectors. Evolving fiscal policies and demographic changes could trigger greater credit dispersion in those sectors.
U.S. and Non-U.S. Corporate Bonds
Corporate credit spreads remain near multidecade tight levels, highlighting the importance of thematic, catalyst-driven security selection. We are maintaining selective participation in M&A and capital expenditure-driven new issues.
We’re also finding select BB-rated issuers with improving credit fundamentals that place them closer to the investment-grade threshold. We believe the best opportunities reside in the two- to 10-year portion of the yield curve, where yield and rolldown effects may be more pronounced.
In Europe, we still favor subordinated bonds in the financial sector. Banks issuing these securities continue to report healthy revenue trends with no signs of deteriorating asset quality.
Money Markets
We expect another quarter of organic growth in money market assets and an increase in the pace of new client investments. The market currently projects no Fed rate cuts until July. Therefore, we favor extending weighted average maturities by purchasing fixed-rate securities maturing in August through December.
We also like floating-rate securities, given the Fed’s secured overnight financing rate (SOFR) has been elevated. An elevated SOFR, combined with the market pushing out the next Fed rate cut, makes commercial paper yields particularly attractive.
Among tax-exempt portfolios, tax-season outflows will prompt us to diligently maneuver between floating- and fixed-rate securities to maintain liquidity and remain patient in extending durations.
Emerging Markets (EM)
In the current market environment of low volatility and loose financial conditions, we expect the search for yield to support the asset class. We seek bonds that, in our view, still offer value due to improving credit trends, multilateral support and a commitment to structural reforms. We prefer idiosyncratic stories with moderate correlation with global macro risks. We also see value in the high-yield space, where fundamentals are improving.
Meanwhile, the near-term outlook for the U.S. dollar has grown murkier due to the Fed’s shift in tone, U.S growth optimism and rising real yields. Accordingly, we prefer flat exposure to EM currencies. Our local rates exposure favors risk-on, higher-yielding countries, such as Mexico, Brazil, India and South Africa.
Explore Our Global Fixed Income Capabilities
The letter ratings indicate the credit worthiness of the underlying bonds in the portfolio and generally range from AAA (highest) to D (lowest).
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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