US Fixed Income in 2026: Opportunities with Short Term Bonds | Amundi HK Retail

US Fixed Income in 2026: Opportunities with Short Term Bonds

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US Fixed Income in 2026: Opportunities with US Short Term Bonds

What is your outlook for the US economy and US fixed income in 2026?

 

The U.S. economy proved resilient in 2025 and is set to continue expanding in 2026. Key contributors for 2026 include more than $100 billion in personal tax refunds , along with rising business investment driven by easier financial conditions, favorable tax incentives, and a lighter regulatory environment.

Meanwhile, we expect inflation to remain elevated above the Federal Reserve’s 2% long term target. Expansionary fiscal policy may slow the pace of progress being made on inflation. In addition, there is an upside risk to inflation to the extent that tariff costs are passed through to consumers by corporations in a slow-and-steady manner, reducing the ability to differentiate between a one-time level shift and a stubbornly elevated inflation rate.

The Federal Reserve delivered three rate cuts in their final three meetings of 2025. But in 2026, in an environment characterized by resilient growth and sticky inflation, we believe the Federal Reserve may adapt a wait-and-see approach as it relates to further adjustments to monetary policy.

Why short duration bonds still stand out in a rate cutting cycle?

 

This rate cut cycle is unique in that the Federal Reserve is so far not seeking to shift into an accommodative stance, but rather, a less restrictive stance. And they may be closer to the end than the beginning of their rate cut cycle. This may leave yields on short-term bonds elevated compared to prior cycles, allowing investors to capture historically attractive levels of income while remaining relatively insulated against the price volatility that often accompanies longer-maturity bonds.

Given the prospect of potential additional rate cuts in 2026, why should investors remain invested in short term bonds in 1H 2026?

 

While policy uncertainty continues to deliver volatility to the longer maturity segments of the bond market via “term premium”, yields on short-term bonds are more directly connected to the near-term outlook on monetary policy. Furthermore, it’s important to remember that some level of rate cuts are already priced into these short-term yields. In fact, we believe the Federal Reserve may ultimately deliver fewer rate cuts in 2026 than are already priced into the yield curve. The floating rate coupons often found in short-term bond strategies can outperform in such a market by both sidestepping interest rate volatility as well as avoiding “locking in” rate cuts that ultimately aren’t delivered by the Federal Reserve.

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