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Fixed-Income Outlook 2026: Bedrock and Balance

02 January 2026

5 min read

2025 was a banner year for bonds. We think more of the same is in store for 2026.

Fixed income enters 2026 from a position of strength. Returns in 2025 were solid across sectors, supported by decelerating growth, easing inflation and monetary easing by most major central banks. The themes that shaped our constructive outlook a year ago—higher starting yields, slowing global growth and a range of opportunities across both rate and credit markets—continue to define the landscape as we head into 2026.

Subdued Global Growth, Frictions to Persist

The world economy slowed in 2025 but proved resilient to significant shocks. In 2026, we expect global growth to remain below its long-run average.

In our view, the range of possible outcomes has narrowed: the probability of a sharp downturn looks lower than it did a year ago, as does the risk of an outsized inflation spike. Beneath this subdued baseline, however, frictions remain—especially around trade flows, tariffs and artificial intelligence (AI)—that could create episodic volatility and lead to increasingly divergent regional cycles.

We expect US GDP to grow about 1.75% in 2026, with momentum building in the second half as businesses adapt to the 2025 tariff regime. But the expansion will likely be uneven: AI-driven investment is boosting profits and financial markets for higher earners while a softer labor market weighs on those without asset exposure, pushing the top 10% toward a larger share of consumption. Deeper technology adoption should help guide inflation toward the Federal Reserve’s target and pave the way for further rate cuts, in our view.

Outside the US, the adjustment to the new tariff regime will likely continue to be a front-page story. China’s economy is slowing as its population ages and trade restrictions increase. To sustain growth, China has redirected exports from the US to other countries. But the Chinese economy faces an even bigger challenge: weak domestic demand is creating deflationary pressures, which Beijing is trying to address with targeted “anti-involution” policies.

Despite tariff threats, the euro area has shown pockets of resilience. However, weaker private demand and easing price pressures suggest to us that—contrary to market expectations—the European Central Bank may have scope to cut rates further in 2026. Meanwhile, we expect UK growth to continue to disappoint in the near term. With inflation likely to ease rapidly in 2026, we see room for the Bank of England to cut rates several times over the coming quarters.

Seven Strategies to Put into Action

Consider these approaches to strengthen fixed-income foundations, absorb volatility and capture new opportunities as they arise:

Actively manage duration.

Historically, yields have declined as central banks have eased. Thus, in our view, bonds are likely to enjoy a price boost as yields trend lower in most regions over the coming two to three years. And demand for bonds could remain exceptionally strong, in our analysis, given how much money remains on the sidelines. As of December 31, $7.7 trillion was sitting in US money-market funds. We expect a significant portion of that to return to the bond market over the next few years as the Fed continues to reduce rates.

In our view, today’s global landscape argues for keeping bonds firmly anchored within overall portfolios—and that means holding duration. If your portfolio’s duration has veered toward the ultrashort side, consider lengthening it. Duration benefits portfolios by delivering bigger price gains when rates decline.

But don’t just set your portfolio duration and forget it. When yields are higher (and bond prices lower), lengthen the duration; when yields are lower (and prices higher), trim your sails. And remember, even if rates do rise from current levels, high starting yields provide a cushion against price declines.

How investors hold that duration also matters. Government bonds remain the purest source of interest-rate sensitivity and remain essential for liquidity. But investors can also take duration through securitized markets such as agency mortgage-backed securities, which provide both duration and incremental yield. Curve positioning, too, is a lever that shapes how portfolios respond as the rate environment evolves. Together, these choices broaden the toolkit.
Think global.

Duration can also be sourced from diverse regions. For instance, leaning too heavily on US duration may concentrate exposure in the same dynamics that contributed to heightened volatility in 2025—tariff-policy volatility, large fiscal deficits, dollar weakness and the debate over US exceptionalism—at a time when global markets offer increasingly differentiated and compelling opportunities. A globally diversified approach to duration—including exposure to the UK and euro area—may offer a sturdier foundation.
Focus on quality credit.

Of course, duration isn’t the whole story. Throughout 2025’s turbulence, credit has shown more resilience than stocks, and we expect that to continue. Investors’ broad risk appetite has kept credit spreads near cyclical lows, but we think yield levels are a more reliable guide to forward returns than spreads alone. And yields remain compelling across many credit-sensitive sectors.

That said, the range of potential outcomes has widened, making selectivity key, in our view. Changing policies and regulations won’t affect industries and companies uniformly, nor will weak economic growth. For instance, energy and financials are likely to face lighter regulation, while import-reliant industries such as retail could struggle. We believe that bond investors should approach the AI-driven capex boom with cautious optimism, looking past the extremes of enthusiasm and aversion.

We think it makes sense to underweight cyclical industries, CCC-rated corporates—which account for the bulk of defaults—and lower-rated securitized debt, as these are most vulnerable in an economic slowdown. A mix of higher-yielding sectors across the rating spectrum—including high-yield corporates, emerging-market debt and securitized assets—provides further diversification.
Adopt a balanced stance.

As we see it, a balanced posture across rates and credit provides a sturdier mix of resilience and income. Among the most effective strategies are those that pair government bonds and other interest-rate-sensitive assets with growth-oriented credit assets in a single, dynamically managed portfolio. This pairing takes advantage of the negative correlation between government bonds and growth assets and helps mitigate tail risks. Combining diversifying assets in a single portfolio makes it easier to manage the interplay of rate and credit risks and to readily tilt toward duration or credit according to changing market conditions.
Temper equity volatility with high yield.

We believe high-yield corporate bonds can play a special role for investors who are rebalancing after this year’s strong equity run. Historically, high-yield bonds have delivered returns comparable to equities but with meaningfully less volatility—and have generally outperformed equities in periods of below-trend growth. In our view, that makes high yield a credible complement for investors aiming to ease equity volatility without materially sacrificing return potential.
Harness a systematic approach.

Today’s environment also increases potential alpha from security selection. Active systematic fixed-income approaches may help investors harvest these opportunities. Systematic strategies rely on a range of predictive factors, such as momentum, that aren’t efficiently captured through traditional investing. What’s more, these strategies aren’t swayed by the headlines that drive investor emotion. Because systematic approaches depend on different performance drivers, we believe their returns complement traditional active strategies.
Protect against inflation.

We think investors should consider increasing their allocations to inflation strategies, given the risk of future surges in inflation, inflation’s corrosive effect and the relative affordability of explicit inflation protection.

Resilient, Responsive, Ready

Taken together, we believe these elements create a stronger, more resilient fixed-income foundation for 2026. In our view, diversified sources of duration, balanced rate and credit exposures, and ample liquidity provide a framework that can absorb uncertainty while remaining nimble enough to quickly capture fresh opportunities as they arise.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

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