2026 Global Fixed Income Outlook
First Quarter
Key Takeaways
A reaccelerating economy in 2026 could keep the Fed on the sidelines, but other factors, including a change in Fed leadership, remain in play.
The Fed continues to navigate a complicated backdrop that challenges its dual mandate of fostering stable prices and full employment.
Our research suggests most fixed-income sectors may offer solid performance potential, particularly when investors pursue an active and diverse strategy.
Looking ahead to 2026, familiar factors are likely to paint the landscape for fixed-income investors. Federal Reserve (Fed) policy, inflation’s trajectory, the labor market’s strength and the economy’s resilience remain at the forefront of our asset class assessment.
U.S. Economy Likely to Gather Strength
Our analysis indicates the U.S. economy should reaccelerate as 2026 progresses. Several factors support this view:
A capital spending wave benefiting the artificial intelligence (AI) industry, along with non-technology-related sectors.
A consumer spending boost supported by federal tax refunds totaling approximately $400 billion, which could lift corporate earnings.
The cumulative effects of Fed easing should loosen financial conditions and help promote economic growth.
This backdrop should broadly support fixed-income assets. The combination of relatively high current yields and gradually declining-to-stable interest rates may generate attractive total return opportunities for many bond investors. In this environment, intermediate-maturity bonds may offer solid performance potential.
Additionally, a growing economy and positive corporate earnings results typically bode well for most credit-sensitive fixed-income sectors.
Inflationary Pressures Persist as Job Market Slows
An expanding economy could trigger higher inflation, which would likely give the Fed pause, particularly if inflation remains above target. Additionally, tariff policy uncertainty continues to threaten consumer prices, at least in the near term.
If the Fed continues to ease in this environment, inflationary pressures could intensify further. Cutting interest rates in an environment of fiscal stimulus and accelerating growth would likely lead to elevated inflation.
But inflation is only one component of the Fed’s dual mandate. Before the government shutdown, data suggested the labor market was weakening, which provided the impetus for the Fed’s late-2025 rate-cut campaign.
The conflicting dynamic of elevated inflation and a slowing labor market has put the Fed in a difficult position. Easing while inflation remains well above the Fed’s target is a risky strategy that could drive prices even higher. But delaying rate cuts could put the labor market and the broader economy at risk of weakening.
Fed Policy: Is the Market Too Dovish?
The futures market expects a series of Fed rate cuts. We’re not convinced. With the economy likely to reaccelerate as the year progresses, we currently expect only one Fed rate cut in 2026.
In our view, a weaker labor market isn’t necessarily a reason to worry. The labor supply is declining, but so is the demand for labor, suggesting balance is returning to the labor market.
There’s also another factor to consider. We believe the Fed’s future course hinges on who becomes the next Fed chair. Jerome Powell’s term ends in May, and President Donald Trump has indicated his desire for the Fed to cut rates more aggressively.
Maintaining an Active Fixed-Income Approach Remains Crucial
The return of “normal” bond yields has helped reinstate fixed income’s role in asset allocation strategies. However, the buy-and-hold core-bonds strategy of the past may not offer compelling performance potential in today’s complex market.
Our research suggests that today’s climate of soaring government spending and debt, volatile interest rates and higher inflation requires a more opportunistic approach. Core bonds still have a role, but we believe maintaining flexibility and strategically allocating and adjusting fixed-income assets are prudent.
Actively adjusting duration, yield curve and credit risk exposure may also help investors capture opportunities and avoid pitfalls. Additionally, making tactical allocations to higher-income securities or underfollowed sectors may enhance investors’ longer-term performance potential.
U.S. Government Bonds
We expect the yield curve may steepen modestly. Fed policy should keep short-maturity Treasury yields steady near 3%, while inflation and federal debt worries may push longer-maturity yields into a range of 4% to 5%.
We still believe select government bonds outside the U.S. offer attractive value versus U.S. Treasuries, particularly in the U.K. 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
Given recent spread tightening, we remain selective and defensive. Across subsectors, we prefer investment-grade securities with shorter durations and structural protections. This focus has served us well in the collateralized loan obligation (CLO) market, where certain loan issuers have experienced credit weakness.
We recently reduced exposure to agency mortgage-backed securities (MBS) following strong performance, and if spreads continue to tighten, we expect to reduce more.
Softness in the agency-backed securities (ABS) sector recently allowed us to build and grow positions in the solar, cell tower and other subsectors.
Municipal Bonds
Overall, we believe the relative high quality and longer duration of municipal bonds may appeal to investors looking to reallocate cash. We expect municipal credit fundamentals to remain stable in the near term, largely due to strong reserve fund balances and the financial flexibility those balances provide.
Valuations remain tight, but we are finding attractive opportunities among municipal bonds in development districts, essential services, prepaid energy and retirement community sectors. We remain cautious in the health care, state and local sectors, where we expect fiscal policies may lead to credit dispersions.
Meanwhile, demographic changes and fluid federal policies may present challenges for higher education bonds.
U.S. and Non-U.S. Corporate Bonds
Despite recent high-profile credit concerns in weaker economic sectors, we still believe the broad credit markets appear healthy. Spreads remain near multidecade tight levels, highlighting the importance of security selection.
Our proprietary credit research has helped identify high-conviction, event-driven opportunities, including select M&A deals. We recently added investment-grade and high-yield securities in the media, finance, electric and real estate investment trusts (REITs) sectors. We believe the best opportunities reside in the two- to 10-year portion of the yield curve, and we expect yield and rolldown effects to drive performance.
In Europe, we remain cautious toward industrial-related bonds, favoring subordinated bonds in the financial sector.
Money Markets
Despite the Fed’s shift to easing mode, money market assets have continued to climb to all-time highs. We expect this trend to persist through the first quarter of 2026, continuing the record issuance of asset-backed commercial paper and U.S. Treasury bills. The Fed may pause again in early 2026, which would prompt us to tactically extend weighted average maturity if the Treasury bill yield curve steepens. Nevertheless, we remain focused on uncovering relative value among fixed- and floating-rate securities for reinvestment purposes.
In the municipal money market, diversification remains key, given our expectations for the record volatility of the SIMFA Municipal Swap Index in 2025 to persist.1
Emerging Markets (EM)
EM bond spreads have compressed to multiyear tight levels, and the risk/reward potential of the asset class looks more asymmetrical. As such, we remain somewhat cautious and more selective. However, trimming risk remains challenging, as the global backdrop and supply/demand factors have been favorable for the asset class.
If the low-volatility, loose monetary policy and resilient growth conditions prevail, EM sovereign spreads should remain appealing, particularly in the high-yield sector.
Meanwhile, the near-term outlook for the U.S. dollar has grown murkier amid Fed hawkishness, resilient U.S growth and rising real yields. Accordingly, we prefer flat exposure to EM currencies. Our local rates exposure favors higher-yielding countries, such as Mexico, Brazil and South Africa.
¹The SIFMA Municipal Swap Index is the primary benchmark for floating-rate municipal debt securities.
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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