Fixed income enters 2026 from a position of strength. Returns in 2025 were solid across sectors, supported by decelerating growth, easing inflation and monetary easing by most major central banks. The themes that shaped our constructive outlook a year ago—higher starting yields, slowing global growth and a range of opportunities across both rate and credit markets—continue to define the landscape as we head into 2026.
Subdued Global Growth, Frictions to Persist
The world economy slowed in 2025 but proved resilient to significant shocks. In 2026, we expect global growth to remain below its long-run average.
In our view, the range of possible outcomes has narrowed: the probability of a sharp downturn looks lower than it did a year ago, as does the risk of an outsized inflation spike. Beneath this subdued baseline, however, frictions remain—especially around trade flows, tariffs and artificial intelligence (AI)—that could create episodic volatility and lead to increasingly divergent regional cycles.
We expect US GDP to grow about 1.75% in 2026, with momentum building in the second half as businesses adapt to the 2025 tariff regime. But the expansion will likely be uneven: AI-driven investment is boosting profits and financial markets for higher earners while a softer labor market weighs on those without asset exposure, pushing the top 10% toward a larger share of consumption. Deeper technology adoption should help guide inflation toward the Federal Reserve’s target and pave the way for further rate cuts, in our view.
Outside the US, the adjustment to the new tariff regime will likely continue to be a front-page story. China’s economy is slowing as its population ages and trade restrictions increase. To sustain growth, China has redirected exports from the US to other countries. But the Chinese economy faces an even bigger challenge: weak domestic demand is creating deflationary pressures, which Beijing is trying to address with targeted “anti-involution” policies.
Despite tariff threats, the euro area has shown pockets of resilience. However, weaker private demand and easing price pressures suggest to us that—contrary to market expectations—the European Central Bank may have scope to cut rates further in 2026. Meanwhile, we expect UK growth to continue to disappoint in the near term. With inflation likely to ease rapidly in 2026, we see room for the Bank of England to cut rates several times over the coming quarters.
Seven Strategies to Put into Action
Consider these approaches to strengthen fixed-income foundations, absorb volatility and capture new opportunities as they arise:
