US bond gains in 2025 set to slow in 2026 amid shifting Fed outlook

U.S. government and high-grade corporate bonds produced an unusually strong showing in 2025, but market participants warn that the conditions that fuelled those gains are unlikely to repeat in 2026, leaving total returns at risk of a marked slowdown.

According to a report by Zhitong Finance APP, the bond rally in 2025 was driven by an accommodative Federal Reserve and a benign “soft landing” in the economy. The Fed cut policy rates by a cumulative 75 basis points during the year, boosting Treasury prices as lower policy rates pushed yields down and made existing, higher-coupon securities more attractive. Morningstar data shows the Morningstar US Core Bond TR YSD Index returned about 7.3% in 2025, its strongest annual performance since 2020, reflecting gains across Treasuries and investment-grade corporates.

That backdrop now looks set to change. Market-implied pricing for 2026 has already reduced expectations for the size of Fed easing: interest-rate futures were pricing roughly 50 basis points of cuts for 2026, versus the 75 basis points delivered in 2025. Fed officials remain divided, and several policymakers have signalled the possibility of no cuts next year. According to the Associated Press, the Fed’s December 2025 decision to lower rates was followed by market moves consistent with hopes for further easing in 2026, but uncertainty about the pace and scale of future cuts is mounting.

“ I think next year will be trickier,” said Jimmy Chang, Chief Investment Officer of Rockefeller Global Family Office, in an interview. He argued that while short-term Treasury yields may fall if the Fed eases once or twice more, the outsized returns from short-dated Treasuries seen in 2025 are unlikely to be repeated. He added that renewed growth , and inflationary pressure from tariffs , could push up longer-term yields and weigh on total returns for Treasuries in 2026.

Duration and the path of the 10-year yield will be central. The 10-year U.S. Treasury yield fell by more than 40 basis points over 2025 to about 4.1% amid the Fed’s cuts, AI-driven capital flows and international rate dynamics that pushed global safe-haven demand into U.S. paper. Looking ahead, forecasters are split but generally expect yields to be roughly around current levels or slightly higher by end-2026: JPMorgan projects the 10-year at 4.35% and Bank of America around 4.25%. Forecasts aggregated by an interest-rate outlook service put the average 10-year yield near 4.09% in late 2025 and show modest variation into mid-2026, while Treasury department materials presented to its advisory committee noted a 10-year assumption near 4.27% as of October 2025.

Nuveen’s Anders Persson said he expects the 10-year to decline toward roughly 4% but flagged a structural risk: rising global sovereign debt and a lift in term premiums that could keep long-end yields anchored or drifting higher. He described his positioning as “underweight duration assets,” signalling caution over long-dated Treasuries which suffer most when long yields rise.

Credit markets present a similar story of stretched valuations and divergent views. Investment-grade credit spreads were around 80 basis points at year end, near levels not seen since the late 1990s, and the ICE BofA US Corporate Index posted total returns close to 8% for 2025. Yet analysts differ on 2026 prospects. JPMorgan warns spreads could widen to about 110 basis points next year amid expectations of heavy corporate issuance from tech firms, cutting prospective total returns for high-quality bonds to roughly 3%. By contrast, BNP Paribas sees spreads ending 2026 close to 80 basis points.

Some strategists remain upbeat. Emily Roland, Co‑Chief Investment Strategist at Manulife John Hancock Investments, told investors she expects disinflation and weaker growth to arrive in 2026 and argued the market has not yet priced those fundamentals, implying further upside for corporate bond prices if her view materialises.

But concerns over an AI-driven borrowing binge have already surfaced in market prices. Credit-default-swap moves and idiosyncratic widening in some technology names suggest investor wariness. The lead article highlighted Oracle’s dramatic credit repricing after heavy AI-related financing, with five-year CDS spreads and long-dated yields moving to levels more typical of much lower ratings. Industry commentary warns that hyperscale AI investment is creating a wave of external financing needs: Morgan Stanley has estimated global hyperscale AI data-centre investment could reach roughly $2.9 trillion by 2028, with a substantial share financed externally.

“If the AI-driven borrowing frenzy continues to heat up while the market sees a flood of new issuances, borrowers will have to pay a higher premium. If companies incur higher borrowing costs, their profits will drop significantly, ultimately puncturing the market’s illusion of false prosperity,” John Stopford, Head of Multi-Asset Income at Ninety One, wrote in a report. Bank of America’s Michael Hartnett has gone further in public notes, identifying shorting certain hyperscaler corporate debt as a high-conviction trade into 2026.

Practical consequences for investors are plain: the exceptional price returns of 2025 were a function of a narrow set of forces , rapid Fed easing, low term premia and compressed credit spreads , that in aggregate produced an unusually benign environment. With rate-cut expectations likely to be smaller in 2026, fiscal stimulus under the new administration potentially boosting growth and borrowing, and stretched corporate credit metrics in parts of the technology sector, many market participants expect a tougher year ahead for total returns.

Portfolio managers have already reacted. Some have trimmed credit exposure and shortened duration; others remain selectively positive on high-quality corporates should growth slow faster than the market expects. For those positioning for 2026, the debate will hinge on whether disinflationary forces and weaker growth outweigh fiscal impulses and AI-driven credit issuance , a binary set of outcomes that, whichever wins out, is likely to produce lower, not higher, aggregate bond returns than the standout year investors enjoyed in 2025.