Fixed income enters 2026 on solid footing, but success will likely hinge on selectivity. With the Fed easing and inflation moderating, income opportunities remain attractive—especially in investment-grade credit and municipals—while high yield and emerging markets offer selective upside. Tight spreads and rising issuance demand suggest active management and disciplined credit selection will be key. This is a year for agility: focus on durable income and sectors where fundamentals and valuations align.
Entering 2026, fixed income markets are supported by a constructive macro backdrop but face a more nuanced return environment. The Federal Reserve is expected to continue its gradual rate-cutting cycle toward a neutral level near 3%, balancing persistent inflation pressures against a cooling labor market. Inflation is projected to trend toward the Fed’s 2% target by year-end, while economic growth and corporate fundamentals remain resilient. These dynamics position fixed income for income-driven returns closer to long-term averages.
Opportunities are increasingly defined by security selection rather than broad beta exposure. Investment grade credit offers historically attractive yields and strong technicals, with relative value in large U.S. banks and select BBB-rated technology issuers tied to AI investment. High yield continues to provide compelling carry, though tight valuations and rising issuance call for disciplined credit selection. Securitized assets and municipal bonds also stand out, with munis benefiting from steep curves and favorable taxable-equivalent yields.
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