- The rare 2025 double win for stocks and bonds is unlikely to repeat in 2026 even if the Fed cuts rates.
- Forecasters see only modest fed-funds cuts while 10-year Treasury yields stay above 4% and potentially rise toward roughly 4.25%–4.60%.
- Sticky inflation, large deficits, and term-premium or political risks could push long yields higher and inflict meaningful losses on long-duration bonds.
- Investors may favor intermediate Treasuries, TIPS, and high-quality credit over long-duration exposure.
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The recent article from Barron’s provides a detailed prognosis for the bond market in 2026, arguing that despite expectations of two cuts to the Fed’s policy rate, long-term bond yields—particularly the 10-year Treasury yield—are more likely to rise than fall. Key supporting views point to strong income growth, sticky inflation around 3%, and widening budget deficits, all contributing to higher term premiums. Analysts suggest that even modest increases in yield would cause losses in bond prices that make long bonds less attractive than short-term money market instruments.
Corroborating this view, a host of recent forecasts reinforce expectations of elevated long-term yields. J.P. Morgan projects 10-year U.S. Treasuries ending 2026 near 4.35%, with similar trends for peer markets like Bunds and gilts. Nuveen also sees 10-year yields settling around 4.25% by year-end, citing inflation persistence and fiscal pressures. Meanwhile, the Congressional Budget Office expects 10-year rates to remain above 4% throughout 2026 unless there are major shifts in inflation or growth.
These projections contrast with the idea that Fed rate cuts will automatically bring down yields across the curve. While short-term yields (e.g., fed-funds or two-year Treasury) are expected to decline if cuts materialize, long-term yields are less sensitive to monetary policy alone and more influenced by inflation expectations, fiscal deficits, global rate trends, and term premium. In such an environment, bonds with longer maturities face material price risk.
For investors and financial institutions, the implications are significant. Portfolios with heavy long-duration fixed income exposure may suffer if yields rise. On the other hand, intermediate-duration Treasuries, inflation-protected securities (TIPS), and quality corporate credit might offer better risk-reward profiles. Also, political risk looms large: the anticipated new Fed chair in May 2026, and the Trump administration’s active involvement (e.g., ordering $200B in MBS purchases), could affect perceived Fed independence and market expectations.
Open questions include the timing and magnitude of rate cuts, the evolution of inflation and growth—especially given potential supply-side shocks (tariffs, wages, global dynamics)—and how term premium behaves in light of record fiscal deficits. Also, how markets price the risk to Fed independence under political pressure will be crucial. These uncertainties mean investors need to build flexibility into duration exposure and monitor forward indicators closely.
Supporting Notes
- In 2025, the Vanguard Total Bond Market ETF (BND) returned just over 7% and the S&P 500 nearly 18%—a rare double win unlikely to repeat in 2026.
- The 10-year U.S. Treasury yield has been stuck between 4.0% and 4.2% recently; economists at Mizuho project it could rise to approximately 4.6% by year-end amid solid growth and inflation.
- Bond bears warn of up to 30% price losses in long-term government bonds if yields rise sharply above policy rates; a 30-year backing to ~6.75% was suggested.
- J.P. Morgan forecasts 10-year Treasuries at about 4.35% by end-2026; also expects Bunds and gilts to move higher in yields globally.
- Nuveen and others project only two Fed rate cuts in 2026, leading to a fed funds rate around 3.75%–4.00%, and 10-year yields around 4.25%.
- The Budget Office (CBO) expects average 10-year Treasury yields above 4% in 2026, in contrast to some long-standing assumptions of sharp rate declines.