Fixed income markets have faced a challenging stretch following the escalation of conflict in the Middle East. Sharply rising oil prices and renewed inflation concerns have pushed US Treasury yields higher, and municipal bonds have moved in tandem.

We expect the US economy to remain resilient in 2026, providing a constructive backdrop for risk assets, as well as corporate and municipal credit. But the mix of macro uncertainty, policy division and elevated deficits could widen the range of potential outcomes and increase rate volatility—especially as the Federal Reserve approaches the neutral rate.

We began the year optimistic that an environment of slowing growth, disinflation and easier monetary policy would be favorable for fixed income markets. Now at midyear, we maintain that view, while acknowledging that policy uncertainty and geopolitical risks may likely result in continued volatility.

Bonds have gained as investors sought shelter amid growing fears around a tariff-driven global economic slowdown.

The municipal bond tax exemption is back in focus. We believe the threat to infrastructure investment outweighs the modest revenue benefits, which could keep the risk of elimination or significant curtailment low.

The managed account industry has seen tremendous growth and client adoption, with assets increasing by 28% over the last year and 50% over the past two years.

As investors continue to step out of cash and potentially rebalance out of equities following their strong performance, we expect bonds to play a larger role in diversified portfolios next year.

Market expectations for Federal Reserve rate cuts in 2024 have shifted dramatically, from six cuts expected at the start of the year, to barely one or two at this writing. Here’s why we think the US economy’s resilience and the year-to-date increase in yields may prolong an attractive opportunity in fixed income.