- LPL expects gradual Fed easing in 2026, with fed funds drifting toward ~3.0% while 10-year Treasuries stay roughly 3.75%–4.25%.
- The outlook favors income over duration gains, keeping core duration neutral and leaning to agency MBS and investment-grade credit.
- Credit spreads are tight despite rising refinancing and default risk, making high yield and leveraged loans vulnerable unless rates fall more or spreads widen.
- Other forecasts cluster around only 1–3 cuts, keeping the terminal rate near 3.0%–3.25%.
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LPL Research’s Fixed Income Outlook for 2026 frames the year as challenging, with the Federal Reserve likely easing policy, but only gradually. Their base case points to a fed funds terminal rate near 3.0%, assuming inflation remains above target and labor markets soften but do not unravel. Correspondingly, 10-year Treasury yields are expected to remain within 3.75%–4.25%. This range suggests limited upside for duration gains, emphasizing income-centered fixed income strategies over duration plays.
Credit markets carry differentiated risks. Investment-grade corporates currently benefit from stable technicals and demand but face rising refinancing costs and growing default risks, particularly among weaker or over-leveraged firms. Meanwhile, lower-rated or high-yield issuers (and “zombie” companies) are increasingly vulnerable. Despite elevated risks, spreads remain compressed relative to long-term historical norms, which could lead to modest widening under stress but drawdowns if yields rise or growth slows materially.
Comparisons with other institutional forecasts reveal rough alignment—but also differences in magnitude. LPL expects gradual easing and only limited rate cuts in 2026. For example, Goldman Sachs projects cuts bringing the funds rate to 3.00%–3.25% by mid-year, following a cautious early 2026 pause. Other economists expect between 1-3 quarter-point rate cuts (totaling 25-75 basis points). Contrastingly, more aggressive scenarios (such as Morgan Stanley’s earlier projections of seven cuts) have been scaled back due to inflation and tariff pressures.
Strategically, fixed income investors should consider favoring shorter to intermediate maturities, agencies and securitized credit, and maintaining core bond exposure rather than extending into longer durations. High yield and riskier credits may underperform in this context unless spreads widen or rate cuts are more aggressive. Balance between income and credit risk is essential, and portfolio construction needs to be nimble in reacting to economic or policy inflection points, particularly around Fed leadership transitions and inflation surprises.
Open questions include: how quickly inflation will converge toward 2%; whether fiscal policy or tariffs will generate renewed upward pressures; how the incoming Fed Chair (term ending May 2026) will influence the rate-cut pace; and how resilient the labor market remains in the face of slowing growth. Each carries significant implications for both fixed income returns and credit spreads.
Supporting Notes
- LPL forecasts fed funds rate near 3.0% by year-end 2026, paired with 10-year U.S. Treasury yields of 3.75%–4.25% and income over capital appreciation as return drivers. Spreads in corporate credit are tight and likely to widen under stress.
- LPL’s credit section highlights high risk for weaker issuers (“zombie companies”), rising refinancing costs, increasing defaults (e.g. Saks, New Fortress Energy, Tricolor Holdings), and that high-yield and leveraged loans are viewed with caution unless rate/credit spread environments improve.
- Goldman Sachs expects 2 cuts in 2026 (March, June), bringing terminal fed funds rate to 3.00%–3.25%, conditional on moderating inflation and still-slow growth.
- Economists surveyed by sources expect 1–3 quarter-point cuts in 2026, likely taking place later in the year; some see total easing of 50–75 basis points.
- LPL also forecasts the Fed’s balance sheet will shift its System Open Market Account (SOMA) toward shorter maturities as Treasury issuance preferences favor two- to seven-year debt, reducing Fed support for long duration bonds.
- LPL’s recommendation is neutral on core bond duration, favoring agency MBS and investment-grade corporates over riskier credits, and emphasizing income generation versus price appreciation. Cash yields may remain unattractive as short-term rates drift down.