Active fixed income
Active Fixed Income Perspectives Q1 2026: Income in focus
January 29, 2026
Cash is no longer king: Yields remain compelling, and intermediate duration looks superior to cash. Carry—the return from income, roll down, and other factors—became king in 2025, and we expect its reign to continue in 2026.
Vanguard Active Fixed Income Perspectives is our in-depth quarterly commentary on the bond markets, with sector-by-sector analysis and a summary of how those views affect Vanguard’s actively managed bond funds.
Key takeaways
Performance
Fixed income delivered strong, broad-based performance in 2025. The Bloomberg U.S. Treasury Index returned 6.32% and the Bloomberg U.S. Corporate High Yield Index returned 8.62%, highlighting the strength across sectors and credit quality. Robust starting yields delivered steady income, while falling front-end interest rates boosted price returns. Municipal bonds staged an impressive comeback in the final four months of the year.
The big picture
Fixed income faces a favorable environment this year, with a modest uptick for the U.S. economy, steady global growth, and easing inflation pressures. Yields remain compelling, and intermediate-duration exposure offers superior return potential compared with cash. With bond markets remaining stable, income will be the primary driver of bond returns in 2026.
Our approach
The Federal Reserve will likely approach additional rate cuts cautiously if the economy grows as expected. We are currently neutral on U.S. duration and are positioned for further yield curve steepening across several markets. In credit, discipline and precision will be needed—fundamentals are sound, yet spreads have little room to tighten amid higher expected supply. Municipal bonds offer compelling opportunities further out on the curve and lower in quality, where selection across credits and call option structures can add value.
Active Fixed Income Perspectives: Q1 2026
Notes:
All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Municipal bond fund distributions, including any market discount recognized by the Fund's investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund’s distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.