2026 Fixed Income Playbook: What Matters Most

Fixed Income as a Stabilizer

Historically, fixed income and equity performance moved in different directions, with bonds tending to do well as equities declined, while bonds tended to lag as equity performance improved. That relationship broke down in 2022 as the Fed hiked rates quickly and both equities and fixed income markets posted dismal returns.

More recently, however, markets have normalized, and the correlation between bond and equity markets has returned to more typical negative territory, indicating fixed income markets have regained their traditional role as an offset to equity volatility in a diversified portfolio.

As Figure 1 shows, the rolling 52-week correlation between intermediate Treasuries (IEF) and equities (SPY), which spiked and remained elevated during 2022 and into 2023, has moved back toward its typically negative range, reinforcing fixed income’s ability to once again act as a stabilizing force during periods of equity market stress.

[Figure 1: Rolling 52-Week Correlation — IEF vs. SPY. Correlations spiked/remained elevated for the 2022–2023 period but have slowly regained their traditional low/negative relationship.]

Fixed Income as a Source of Return

Over much of the last decade and a half, investors got used to zero interest rates and very low yields across every fixed income sector. With rates at more normal levels — and the chance of a return to a zero interest rate policy seemingly remote — fixed income once again offers an attractive level of income for investors, with the prospect for that income to be durable over time.

Additionally, even though inflation is above the Fed’s 2% target, we believe it will continue to trend lower. Rates across the curve remain well above the level of inflation, allowing investors to generate a potential reasonable real return over and above the rate of inflation — with the potential for that return to rise further should inflation continue to moderate.

As illustrated in Figure 2, 10-year real yields remain meaningfully positive — a notable departure from much of the post-financial-crisis period when real yields were often negative or negligible — underscoring fixed income’s renewed potential to generate durable income while helping preserve purchasing power.

[Figure 2: 10-Year Real Yields. Real yields are meaningfully positive (highest since pre-Global Financial Crisis) and providing a meaningful source of return in a portfolio.]

Opportunity Set is Key

Traditional fixed income benchmarks only include a portion of the investable universe, with much of that concentrated in high-quality (and hence lower-yielding) government-guaranteed issues. Passive strategies using those traditional benchmarks therefore miss many higher-yielding opportunities that exist outside of those benchmark sectors.