Cash is less compelling as income opportunities improve. Attractive yields highlight intermediate‑duration bonds and high‑quality credit, supported by solid fundamentals. The outlook favors diversification, selective credit exposure, and longer‑maturity municipal bonds for steady income ahead.
Key takeaways
Performance recap
Fixed income delivered strong, broad-based performance in 2025. The Bloomberg U.S. Treasury Index and Bloomberg U.S. Corporate High Yield Index returned 6.32% and 8.62%, respectively, highlighting the strength across sectors and credit quality. Robust starting yields delivered steady income, while falling front-end rates boosted price returns. Municipal bonds staged an impressive comeback in the final four months of the year.
The big picture
Fixed income faces a favorable environment this year, with a modest U.S. economic uptick, steady global growth, and easing inflation pressures. Yields remain compelling, and intermediate duration exposure offers superior return potential compared with cash. With bond markets remaining stable, income will be the primary driver of bond returns in 2026.
Our approach
The Federal Reserve will likely approach additional rate cuts cautiously if the economy grows as expected. We are currently neutral on U.S. duration and are positioned for further yield curve steepening across several markets. In credit, discipline and precision will be needed—fundamentals are sound, yet spreads have little room to tighten with higher expected supply. Municipal bonds offer compelling opportunities further out the curve and down in quality, where selection across credits and call option structures can add value.
Related items
Notes
- Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Municipal bond fund distributions, including any market discount recognized by the Fund's investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund’s distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.
- Diversification does not ensure a profit or protect against a loss.