As bond investors look to 2026, inflation, monetary policy and growth are moving in different directions across major economies.
Julien Houdain, head of global unconstrained fixed income at Schroders, noted that 2025 has been a year of differentiation in bond markets, with large divergences in yield moves – both between geographies and at different maturities of the curve.
“We expect this to continue as we head into 2026,” Houdain said. “This provides huge opportunity – but only to those who are active in their bond allocation and capable of taking advantage of fast-changing and disparate economic conditions globally.”
Remaining passive in such an environment could leave portfolios overallocated to the relative ‘losers’ as yield moves diverge, which could, in turn, lead to underwhelming returns and greater risks, he added.
Developed markets
As investors weigh their options, developed markets offer contrasting dynamics. In the US, moderating inflation and resilient growth will potentially create a supportive backdrop for high-quality bonds, while Europe faces a tug-of-war between technical pressures and monetary stability.
Lisa Hornby, head of US fixed income at Schroders, said that high-quality US fixed income sectors look set to benefit as supportive conditions persist into 2026.
“The strong performance in 2025 reinforces the thesis that starting yields matter and investors who focus on quality and value are likely, in our view, to be rewarded as supportive conditions carry into next year,” she said.
However, others believe the US is likely to remain a risk.
Mike Riddell, portfolio manager at Fidelity International, said: “Markets are pricing in around four rate cuts in mid-2026, which we struggle to reconcile with strong economic activity and easy financial conditions,” Riddell said.
“The Fed may resist to some degree, but the [US president Donald] Trump administration will still push for lower rates. As a result, we think the dollar move we have seen this year is the start of a much more structural decline.”
When paired with mid-term elections, a high budget deficit, the Trump administration’s policies, the high valuations of artificial intelligence (AI) companies and the vulnerability of unlisted credit, a sustained level of volatility in 2026 is likely.
In Europe, Alexandra Caminade, head of sovereign, emerging market and aggregate fixed income at Ostrum Asset Management, expects German 10-year bond yields to evolve in a context of reduced volatility in 2026, with bullish and bearish factors offsetting each other.
“Uncertainty surrounding the valuation of AI companies and tensions in the US unlisted credit market should support demand for German debt,” she said.
In addition, the European Central Bank’s monetary status quo should help to anchor the short end of the curve, automatically benefiting 10-year bonds via the associated slope and carry/roll-down, Caminade added.
“However, upward pressure will remain, linked to the increase in gross and net issuance in Germany, as well as the effects of the Dutch pension fund reform, which will mainly affect long maturities,” she said.
Investors’ growing disinterest in very long maturities “should accentuate this trend”.
“After a steepening of around 40 basis points on the 10 to 30-year segment since the beginning of 2025, a further rise of around 20 basis points is expected in 2026,” Caminade said.
State Street Investment Management also suggested that UK gilts look more appealing given a sluggish economy and prospects for rate cuts, while Japanese government bonds could benefit from an end to the hiking cycle and bank cash deployment.
Emerging markets
While developed markets present a mix of opportunity and uncertainty, some investors are turning their attention to emerging economies, where high real yields and improving fundamentals are creating a compelling case for local currency debt.
Abdallah Guezour, head of emerging market debt and commodities at Schroders, said: “As global investors are now starting to recognise the macroeconomic adjustments experienced by key emerging market countries in the post-pandemic period, a recovery in portfolio flows to emerging market fixed income markets is underway.”
He noted that the currency cycle now appears to be turning in favour of non-US asset outperformance.
“This environment, combined with abundant global financial liquidity, reinforces the relative attractiveness of emerging market debt, particularly in local currency segments,” he said.
“We continue to favour markets such as Brazil, Mexico, South Africa, India and parts of central Europe, where valuations remain compelling and policy flexibility is high.”
Riddell also said that local currency emerging market debt is one of his “key convictions” for 2026.
“With valuations at ‘crisis’ levels in many emerging market currencies and a US administration keen to talk down the dollar, I see a strong case for looking at emerging economies where rates are still high and there’s further scope for currency appreciation,” Riddell said.
As an example, he said central bank rates in Brazil stand at 15%, the economic outlook is solid and inflation is around 5%. “Holding Brazilian sovereign bonds at these real yields feels like a no-brainer,” he said.
However, on the demand side, Riddell said he has not seen supportive market conditions for a while and “many investors are understandably still scarred from the poor performance of emerging market bonds over the past decade”.
“While the emerging market trade has been talked about all year, the money, in bulk, has yet to arrive,” he said.
“This sets the scene for 2026, where we see the possibility of much greater allocations into emerging market debt on the back of 2025’s strong returns and continued cheapness in many places.”
Private credit
Finally, as traditional fixed income faces uneven prospects, some investors are looking beyond public markets to private credit for diversification and yield in 2026. Asia, in particular, is expected to be a hotspot.
Joanna Munro, CEO for HSBC alternatives at HSBC Asset Management, noted that returns in private credit may be moderate with interest rate cuts in 2026, yet “yields remain above many institutional thresholds”.
As such, a more conservative approach with a focus on quality may be appropriate.
“Asia remains one of the most compelling private credit markets globally,” Munro said. “Demand for financing is rising sharply, supported by smart-city construction, renewable energy expansion, rising domestic investment flows and strong corporate financing needs.”