US Bonds Delivered Strong 2025 Gains — What to Expect for 2026 Returns

The bond market delivered a strong performance in 2025, driven by a combination of Federal Reserve policy easing, resilient economic growth, and declining inflation. The Fed cut rates by approximately 75 basis points during 2025, which lowered short-term yields and enhanced the appeal of existing, higher-yielding bonds. As yields fell, bond prices rose, boosting total returns. Investment-grade corporate bonds benefited further from narrow credit spreads due to companies’ strong profits and limited perceived default risk. [1]

However, multiple dynamics suggest that replicating 2025’s bond returns in 2026 will be challenging. First, the Fed is expected to ease policy more cautiously—market pricing and strategists anticipate about 60 basis points of rate cuts in 2026, versus more aggressive cuts seen this year. This reduces the upside for yield instruments and curbs further gains from falling rates. Second, fiscal stimulus—through tax and spending policies—could boost growth and inflation expectations, pressuring long-term Treasury yields upward. That would erode bond price gains, especially for bonds with longer maturities. [1]

Credit markets could also face strains. Investment-grade credit spreads are near historical lows (~80 bps) as of late 2025. Increased corporate debt issuance—particularly from tech firms—may exert downward pressure, potentially widening spreads to ~110 bps in some forecasts, which could curtail returns. Meanwhile, high-yield bonds posted returns similar to investment-grade in 2025, but are more vulnerable to changing economic conditions. [1]

From a portfolio strategy standpoint, duration risk becomes more significant in 2026. Given the potential for long yields to drift higher, investors might favor shorter or intermediate maturities to avoid adverse price moves. Also, high yield from entry rates, elevated coupon income, and quality credit selection could offer more stable return sources. [2]

Open questions remain around inflation direction, the extent and execution of fiscal policy, and how durable economic growth will be. Particularly, whether inflation reaccelerates, or whether aggregate demand softens, will drive much of yield curves and bond returns. Bond markets seem priced for a relatively benign slowdown rather than a sharp recession. [2]