Schroders Fixed Income Outlook 2026

By Julien Houdain, Head of Global Unconstrained Fixed Income, Lisa Hornby, Head of US Fixed Income, and Abdallah Guezour, Head of Emerging Market Debt and Commodities, at Schroders

2025 has been a year of differentiation in bond markets, with very large divergences in yield moves, both between geographies and at different maturities of the curve. Schroders expects this to continue as we head into 2026.

Why? Simply because growth, labour market and inflation outlooks are desynchronised by country, and major central banks are at different stages of their policy cycle. The US Federal Reserve (Fed) and Bank of England remain in the easing phase, the European Central Bank looks to be happily on hold, and the Bank of Japan is not yet done hiking rates.

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. Passive management in this environment could leave portfolios overallocated to the relative “losers” as yield moves diverge, and that could lead to underwhelming returns and greater risks.

Too much of a good thing?

We are optimistic about the outlook for the US economy in 2026 with both fiscal (as the full impact of the One Big Beautiful Bill Act hits) and monetary easing (spurred by a softening labour market in mid-2025) working their way into the economy.

While we welcome the government and central bank support to reduce the rising hard-landing risks we saw in the summer of 2025, we worry about policymakers overcooking it on stimulus. Too much of a good thing is a real possibility, in our view. We are watchful for signs that policy has become too stimulative, such as a re-tightening of the labour market or rising core inflation and wages.

After a period of outperformance for US bonds, we are seeing better opportunities emerge for global portfolios. We also believe having inexpensive inflation protection is prudent given a strong growth outlook, dovish policymaking and the ongoing threat of weakened credibility of the Fed with the end of Jerome Powell’s term in May 2026 and the appointment of a new Chairperson.

Europe’s economy has been slowly improving throughout 2025. We see this continuing into next year, with German fiscal stimulus being additive, but not a game changer to overall eurozone growth, in our view.

The only certainty is uncertainty

Whether its concern over concentrated AI-driven growth, inflated equity prices, volatile US policy or other risks, the diversification benefits of fixed income as an asset class are increasing as inflation pressures globally remain benign.

For those investors still heavily invested in cash, the safety net is not as strong as it once was. With cash rates falling and unable to keep pace with rates of inflation, bonds remain an attractive income opportunity.

Patience is a virtue

Corporate bonds have enjoyed another year of positive performance, but we see the valuation starting point as the key driver of forward-looking returns. The spread earned for taking additional credit risk over government bonds is now at historically low levels. With these very tight spread levels, having significant exposure here seems unwise currently.

Opportunities to add risk in credit will present themselves in 2026. They always do, and we rarely know the catalyst in advance. Given our optimistic growth outlook, we believe retaining significant ability to deploy capital when these better opportunities arise is the most sensible approach. In the meantime, it’s important to use rigorous fundamental research, look where other investors are not and continue to innovate to generate alpha within corporate bonds.

US : positioning for quality in a higher-yield world

The broader US fixed income market continues to offer an attractive prospective return profile, especially as we look toward 2026. The current environment calls for greater selectivity across sectors. We see value in increasing exposures to high-quality duration assets such as tax-exempt municipals and securitised instruments, while avoiding generic credit beta that no longer offers sufficient spread premium. With yields already attractive, investors do not need to stretch for incremental income. Schroders believes the focus should remain on securities and sectors where income is sustainable, and downside risks are limited.

Despite ongoing uncertainty, the core message remains: US fixed income markets continue to benefit from moderating inflation, more stable fiscal dynamics and a resilient — if slower — economy. In this environment, high-quality sectors such as agency MBS and long-dated tax-exempt municipals should remain well positioned in 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.

EM debt: the stage is set for a new reallocation cycle

Emerging market (EM) debt is on track to deliver a third consecutive year of strong returns, as markets continue to reward the macroeconomic adjustments experienced by key EM countries in the post-pandemic period. These adjustments — which broadly preserved fiscal and balance of payments sustainability and enhanced external buffers — explain the recent growth resilience of emerging markets in the face of the global trade and geopolitical dislocations. As global investors are now starting to recognise these achievements, a recovery in portfolio flows to EM fixed income markets is underway. This capital reallocation cycle is still in its early stages and has further to go. Global asset allocators are still severely underinvested in the asset class despite its strong outperformance of recent years.

More room for monetary easing

In Schroders’ view, this recovery in capital flows will be supported by emerging markets’ economic growth, which is expected to strengthen in 2026, thanks to improving domestic liquidity conditions as EM central banks regain further room to ease monetary policy. This upturn in monetary and credit cycles is unfolding against the backdrop of already robust private sector balance sheets, which should enhance the transmission of policy stimulus into real economic activity. Encouragingly, EM exports have also remained resilient despite the headwinds from recent US trade tariffs.

We expect these dynamics to keep the average EM growth premium over the US at levels that have been historically sufficient to sustain the recent renewed investors’ appetite for EM assets. However, China’s growth trajectory may remain subdued, as it could be constrained by persistent weakness in the property sector and the lingering risk of renewed trade or geopolitical tensions with the United States. That said, continued calibrated policy support in China and a still-solid external position — including a healthy trade surplus and ample foreign exchange reserves — should continue to provide a meaningful buffer against downside risks.

The global disinflation trend of the past two years remains intact, although the US may soon be an exception as tariff effects could start to feed through, thereby maintaining price pressures and potentially undermining the credibility of the Federal Reserve’s current easing cycle. While this represents a risk for EM assets, we take comfort from the fact that EM inflation remains more benign, supported by subdued food and energy prices and China’s ongoing export of deflation.

A favourable inflation outlook

This disinflation emanating from China is particularly beneficial to EM economies with lower trade barriers and minimal export overlap with China – most notably the commodity-exporting nations in Latin America and Eastern Europe, the Middle East and Africa. With this favourable inflation outlook, real rates across EM remain unnecessarily too high and 10-year local government bond yields still offer appealing value. This appeal is reinforced by more favourable public sector debt dynamics in EM, especially when compared with their developed markets counterparts.

A currency cycle that may favour non-US assets

This favourable outlook could also be boosted further should the US dollar continue the cyclical downturn that was initiated in 2025. While intermittent rebounds of the dollar should be expected and will require active currency risk hedging, various factors will continue to put pressures on the greenback. Indeed, the dollar remains expensive on a real effective exchange rate basis. It is also losing interest rate support and is increasingly affected by the unsustainable accumulation of twin deficits — fiscal and current account. With the dollar having broken its 15-year uptrend this year, the currency cycle appears to be turning in favour of non-US assets outperformance. This environment, combined with abundant global financial liquidity, reinforces the relative attractiveness of EM debt, particularly in local currency segments. 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. While EM dollar-denominated debt spreads have already tightened substantially, this sector still offers attractive high-income opportunities, especially among selective high-yield sovereign and corporate issuers.

Further reading

All Schroders Outlook 2026 articles can be found here.