Fixed-income investors should brace for another volatile and dynamic environment in 2026. Evolving macroeconomic conditions, including shifts in global monetary policy, are top concerns. Let’s explore the key themes for the coming year and what we expect to influence fixed-income markets.

Central bank policy and interest-rate landscape 

We believe that monetary policy will remain a key driver for fixed-income assets in the new year. We expect central banks to remain accommodative while balancing inflation, labor markets, and growth concerns. The U.S. labor market is weakening and is expected to soften further. The case for additional interest-rate cuts will increase as the unemployment rate drifts higher. It is important to ask: Can the U.S. economy recover quickly from its longest government shutdown in history? In isolation, the answer would likely be “yes.” But when one factors in rising unemployment, a weakening labor market, job displacement from artificial intelligence (AI), and a bifurcated consumer, the answer becomes less clear. 

While some economies may see rate cuts as rising prices moderate, others could maintain higher rates to anchor inflation expectations. It will be crucial for bond investors to monitor guidance from the Federal Reserve (Fed), the European Central Bank, and the Bank of England.

Inflation trajectory and real yields 

We have witnessed several years of elevated inflation and have now slowly started to see it level off or moderate, as measured by government metrics such as the consumer-price index (CPI) and the producer-price index (PPI). Still, inflation continues to hover stubbornly above the Fed’s 2% target and further improvement may be difficult. Consumer spending remains solid, clearly contributing to the stickiness of the CPI, alongside rising prices from tariffs. Relief could come from oil prices, as U.S crude oil briefly dropped below $55 a barrel in mid-December—its lowest level since early 2021. Weakness in the housing sector, a cooling labor market, and the negative impact of the 43-day U.S. government shutdown in October and November on economic growth are additional factors that could relieve inflationary pressures. In terms of inflation, 2026 may bring more stability, though risks remain.

Credit quality and corporate bond outlook 

The credit cycle is expected to mature in 2026, with increased dispersion in corporate fundamentals. To date, earnings have remained strong, contributing to stubbornly tight credit spreads. Investment-grade spreads have been resilient amid the ongoing growth battle and uncertainty around future borrowing costs. Spreads remain at cycle tight levels, presenting challenges to investors seeking incremental yield and reducing the ability to hedge against rising interest rates. Higher borrowing costs and refinancing needs could ratchet up pressure on lower-rated issuers, leading to wider spreads and selective defaults. The persistent spread compression signals investor confidence in corporate solvency and strong fundamentals, supported by healthy balance sheets and muted default risk. Growth concerns, trade friction, unknown geopolitical events, and midterm elections (and the resulting policy impacts) will drive the future direction of spreads. While yields are likely to come down in short- and intermediate-term maturities, the direction of longer-dated yields remains to be seen. A dovish Fed can influence short-term yields through the federal funds rate or asset purchases, but debt levels and signs of inflation could prop up longer-term yields. On the other hand, lower long-term yields could signal that a recession is looming or prompt a flight to quality. 

Global divergence and emerging markets 

Global market divergence is occurring at an unprecedented pace. Factors such as technology (including AI advancements), demographic shifts, geopolitical conflicts, and idiosyncratic shocks are contributing to this trend. While developed markets may experience slower growth, select emerging economies could outperform, supported by demographic trends, fiscal stimulus, and a weakening U.S. dollar. This change creates the need to take a step back and look at one’s overall portfolio as this divergence creates both risks and opportunities. Currency volatility, geopolitical events, and unsynchronized global central bank policy have the potential to reshape investors’ allocations. The good news is that the U.S. economy has proven to be quite resilient, demonstrated multiple times by the ability to bounce back following economic slowdowns or downturns in risk markets. Fiscal and monetary stimulus may boost consumer spending, which comprises roughly 70% of the economy. However, investors must monitor widespread inflation and plan accordingly.

Government policy implications 

In 2026, government policy could throw a wrench into the works of the U.S. economy, which is currently running (somewhat) smoothly. Midterm elections will shape the second half of the year, impacting fiscal priorities for the remainder of Trump’s second term. Potential shifts in congressional control could influence trade policy, tax reform, and spending initiatives—all major influences on capital flows and risk appetite.

We expect the tariff tantrum of April 2025 to resurface in the coming quarters. The Supreme Court is reviewing Trump’s use of the International Emergency Economic Powers Act (IEEPA) to impose sweeping tariffs, with a ruling expected in early 2026. A decision against the administration could invalidate billions of dollars in revenue and force refunds while removing a key policy lever at the president’s disposal. Tariffs have already generated $101.2 billion in revenue through August 2025 and proposals such as $2,000 dividend checks to households highlight fiscal redistribution debates. Meanwhile, trade negotiations between the U.S. and China continue, with rare-earth export controls and potential chip allowances (e.g., Nvidia H200 chips) as sticking points. 

Going forward… 

Fixed-income investors will face shifting policies, a new Fed chair, changing inflation trends, and technological advancements in 2026. Global divergence within economies and investments will likely reshape the landscape for governments, businesses, and individuals alike. With these factors in mind, we seek to build resilient portfolios and take advantage of evolving market opportunities.

GLOSSARY AND INDEX DEFINITIONS

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IMPORTANT INFORMATION

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. All information as of the date indicated. This information should not be relied upon by the reader as research or investment advice and is for educational purposes only. 

Statements that are not factual in nature, including opinions, projections, and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. 

Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assume any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI. 

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Information in the U. S. is provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI). SEI Fixed Income Portfolio Management is a unit of SIMC.