US bonds shine in '25 but returns could lose altitude in new year

Investors are now weighing whether a less aggressive Fed and new fiscal policies could halt that momentum, posing a challenge for total returns

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US bond investors may face a tougher 2026, with some market-watchers forecasting slower returns as the Federal Reserve dials back rate cuts and potential fiscal stimulus complicates the outlook after a banner year.

The cautious forecast comes after a strong 2025 for bondholders, when Fed easing and a supportive economy fueled the market's best performance since 2020. Investors are now weighing whether a less aggressive Fed and new fiscal policies could halt that momentum, posing a challenge for total returns.

A rate-cutting Fed that trimmed rates by 75 basis points in 2025 fueled this year's bond rally, since lower policy rates push down yields and make older bonds, with their comparatively higher payouts, more valuable. On the corporate debt side, a resilient US economy shored up companies' profits, keeping the extra yield investors demand to hold corporate bonds instead of US Treasuries near historic lows. Total returns for the Morningstar US Core Bond TR YSD index, which tracks dollar-denominated securities with maturities greater than one year, were about 7.38 in 2025, the highest since 2020. The index includes investment-grade government and corporate bonds.

Many expect market conditions to remain somewhat similar in 2026, but total returns, which include bond payouts and price fluctuations, could struggle to match 2025's performance.