Our most reasonable assumption for 2026 is a scenario of range-bound rates, in which bond performance is driven primarily by coupon income rather than significant capital gains. Following the sharp adjustment of recent years, interest rates across major markets have normalized, standing above inflation and broadly in line with long-term historical averages. This backdrop pleads for a defensive, low-volatility fixed-income allocation focused on income generation.

Under conditions of continued economic growth and moderate inflation, medium- and long-term government bond yields are expected to remain largely range-bound in 2026. Solid nominal growth provides a floor under yields, while the absence of major inflation shocks limits the risk of a sharp upward move. Market sentiment will continue to fluctuate with changes in growth and inflation expectations, but sustained trends in either direction appear unlikely. If anything, ongoing fiscal support and rising public debt levels may exert mild upward pressure on longer maturities.

In this environment, we expect 5- to 10-year US Treasury yields to trade within a 3.5%–4.5% range. In the euro area, German government bonds of similar maturities should remain between 2% and 3%. UK gilt yields are likely to stay elevated, above 4%, reflecting persistent inflation dynamics and fiscal uncertainties, while Swiss yields should remain anchored close to zero.

This setting restores bonds’ traditional role as a source of stable income. Investors should not expect significant capital gains from sovereign bonds in 2026; instead, coupons will be the primary contributor to total returns. While downside risks on rates coming from a sharp growth slowdown, or upside risks from overheating inflation cannot be dismissed, they currently appear to have low probabilities.

In any case, for multi-asset portfolios, government bonds should no longer be viewed as a systematic hedge against equity risk. Their historical role as a reliable diversifier was closely linked to a low-inflation regime, which no longer prevails. With inflation still above 2% in most developed markets, the bond–equity correlation is more unstable, reducing the defensive value of sovereign bonds in diversified portfolios.

Emerging market

The outlook for Emerging Market debt in 2026 is broadly constructive, supported by a combination of improving global growth dynamics, easing trade uncertainty, and relatively contained inflation outside a few developed economies. In our central scenario of range-bound global interest rates, EM debt stands out as an attractive source of yield carry, even though valuations are no longer cheap by historical standards.

Spreads across EM hard- and local-currency debt have tightened significantly over the past two years, reflecting improved macro fundamentals, proactive policy frameworks, and reduced external vulnerabilities in many countries. While the scope for further spread compression is limited, the risk of a sharp and sustained widening appears contained in an environment of positive global growth. As with other segments of fixed income, carry is therefore expected to be the dominant driver of total returns in 2026.

Several structural factors are supportive. Many emerging economies have emerged from the recent inflation shock with healthier balance sheets, lower fiscal deficits, and improved current account positions. The expected easing of global trade tensions and the restart of the global capex cycle should further support export-oriented EM economies and investment flows. In addition, a relatively benign inflation environment across much of the EM universe gives local policymakers room to maintain accommodative stances, which is supportive for both growth and debt sustainability.

Selectivity will remain crucial. Investors should focus on countries with credible policy frameworks, improving growth trajectories, and stable political backdrops, while avoiding issuers vulnerable to fiscal slippage or external financing shocks. Local-currency debt offers opportunities where real yields remain attractive and inflation expectations are well anchored, while hard-currency bonds can provide more defensive exposure.

Overall, EM debt in 2026 should offer attractive income and diversification benefits within fixed-income portfolios, provided allocations are carefully constructed and actively managed.