After a year of interest rate cuts across most developed nations, central bank policy is likely to be a key driver of fixed income markets in 2026, industry commentators have told Portfolio Adviser.

The Federal Reserve cut interest rates three times in 2025, and the central bank is set to remain in focus this year with US president Donald Trump set to appoint a successor to current Fed chair Jerome Powell.  

David Katimbo-Mugwanya, head of fixed income at EdenTree Investment Management, says bond markets will be shaped by an interplay of macroeconomic forces in the coming year, with potential rate cuts expected to be the “key” driver.

“This is against a backdrop of higher-than-expected but gradually declining inflation and rising unemployment across major economies,” he says.

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On the Fed, Katimbo-Mugwanya adds Powell’s replacement is likely to favour lower interest rates, increasing the prospect of more near-term Fed rate cuts.

Meanwhile, the Bank of England is also expected to continue its cutting cycle, with Europe and Canada’s central banks expected to remain neutral and the Bank of Japan heading in the opposite direction.

However, Ninety One head of managed income John Stopford notes fewer rate cuts are forecast for the next 12 months.

“Global fixed income is reaching an interesting juncture as we head into 2026,” he says.

“Firstly, the policy easing cycle in most economies is fairly mature, with far fewer rate cuts forecast for next year.

“Secondly, many major economies are running very loose fiscal policies despite high debt levels and low unemployment rates.”

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Another dynamic set to impact fixed income markets is the surge in corporate bond supply as a result of increased spend on data centres.

Some of the biggest deals of 2025 came from the likes of Meta and Amazon as the US tech giants increasingly turned to the bond markets to fund their AI spend.

“Corporate bond supply is picking up led by data centre spending at a time when credit spreads are very low relative to their history and there are some signs of stress among a number of borrowers and sectors,” says Stopford.

Lothar Mentel, CIO at Tatton Investment Management, agrees that factors affecting bond markets will vary by region: “Fed cuts will push down short-term US bond yields, while resurgent growth and potentially higher inflation will push up long-term yields – a steepening of the curve, which would extend the funding pressures for smaller companies,” he says.

“European yield curves will likely flatten, as the ECB holds short rates steady and fiscal policy looks less expansive than expected this year (unless Russia gets more aggressive and Europe has to fund even greater defence spending).

“UK bond yields depend on the government’s stability, but investors like Britain’s higher yields and strong currency. On corporate credit, default rates will likely rise amid a capital rotation, with more capital required in the real economy to build infrastructure. That healthy churn doesn’t mean systemic credit risk, though.”

Positioning

In terms of positioning, EdenTree’s Katimbo-Mugwanya explains the firm’s strategy for the year is to remain “selective and flexible”.

“We favour shorter to intermediate maturities, and we think there’s scope to go further down the capital structure in high-quality credit to capture yield and enhance carry – an important contributor to returns assuming spread movements remain relatively benign.

“New issuance continues to offer attractive opportunities, given how tight credit spreads are; we will continue to take advantage of these opportunities into 2026.”

“Our takeaways from [the macro backdrop] are as follows; further broad gains in global government bonds are likely to require a downshift in growth or investor risk appetite, longer dated sovereign bonds may require an increasing risk premium to encourage investors to own them, and corporate bonds in general offer too little compensation for their risk,” says Ninety One’s Stopford.

“As a result, we are cautious towards duration in general, other than as a risk hedge, but do see opportunities in selective markets with a favourable yield curve dynamic, such as New Zealand, and selective Emerging bond markets where policy easing is still not fully priced in; with Mexico, Brazil and Colombia, for example, offering value.

“We tend to prefer short to medium dated bonds in most markets rather than longer maturities. We also see options as a fairly cheap way to benefit from any further rally in broad market yields while protecting against the risk of market weakness. We also have little exposure to corporate bonds and prefer owning certain agency and quasi government bonds to earn some additional yield.”