--- title: "Is the \"highlight moment\" of the U.S. bond market difficult to replicate? The unclear interest rate cut path combined with fiscal stimulus may lower total returns in 2026" type: "News" locale: "en" url: "https://longbridge.com/en/news/271168867.md" description: "The U.S. bond market performed well in 2025, but investment returns may decline in 2026. Market observers predict that the outlook for the bond market has become more challenging due to the Federal Reserve's slowdown in interest rate cuts and the complexities of fiscal stimulus policies. In 2025, a 75 basis point rate cut by the Federal Reserve drove a rebound in Treasury prices; however, future rate cut policies and new fiscal policies may pose challenges to the total returns of the bond market. Although bond investment returns reached 7.3% in 2025, they may face lower returns in 2026" datetime: "2025-12-31T03:47:02.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/271168867.md) - [en](https://longbridge.com/en/news/271168867.md) - [zh-HK](https://longbridge.com/zh-HK/news/271168867.md) --- > Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/271168867.md) | [繁體中文](https://longbridge.com/zh-HK/news/271168867.md) # Is the "highlight moment" of the U.S. bond market difficult to replicate? The unclear interest rate cut path combined with fiscal stimulus may lower total returns in 2026 The U.S. Treasury market and high-rated corporate bond investors may face a more challenging environment in 2026. Some market observers predict that as the Federal Reserve may significantly slow down its rate-cutting pace, and with potential large-scale fiscal stimulus measures driven by the Trump administration's "Big and Beautiful Act," the investment outlook for the U.S. Treasury market will become more complex. The investment returns in the U.S. bond market (U.S. Treasuries + corporate bond market) may slow down in 2026, following a standout year for bond funds in 2025. According to Zhitong Finance APP, this cautious market consensus emerged after bondholders navigated an unexpectedly strong 2025, where the Federal Reserve's loose monetary policy and a "not too hot, not too cold" favorable "soft landing" economic environment propelled the U.S. bond market to its best performance since 2020. Investors are currently weighing whether a less aggressive Federal Reserve in terms of rate cuts and new fiscal policies will hinder this growth momentum, thus posing a strong challenge to the total returns of the U.S. bond market. In 2025, the Federal Reserve's rate-cutting cycle—cumulatively lowering rates by 75 basis points throughout the year—significantly boosted U.S. Treasury prices, as lower policy rates greatly depressed yields and made existing bonds (due to their relatively higher coupon payments) more attractive. In the U.S. corporate bond market, the resilience of the U.S. economy supported corporate profits, keeping the extra yield demanded by investors for holding corporate bonds over U.S. Treasuries near historical lows, indicating particularly strong price returns for corporate bonds in 2025. However, there were exceptions—Oracle's investment-grade corporate bonds, at the core of the "AI bubble storm," fell sharply due to performance prospects overly reliant on the loss-making OpenAI and record bond issuance. Latest statistics show that the Morningstar US Core Bond TR YSD index, which tracks dollar-denominated bond assets with maturities over one year, had a total investment return of approximately 7.3% in 2025, marking the strongest investment return since 2020. This benchmark index includes U.S. Treasuries and investment-grade corporate bonds. ![1767151712(1).png](https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20251231/1767151713848310.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg) While some investors expect the U.S. bond market environment in 2026 to remain somewhat similar, the total investment returns, including bond coupons and price fluctuations, may struggle to match the strong performance of 2025. The market generally expects the Federal Reserve to cut rates less in 2026 than in 2025; as of Monday, interest rate futures traders are pricing in about 50 basis points of easing expectations for 2026, compared to the 75 basis points already cut by the Federal Reserve in 2025. Additionally, there is significant divergence among Federal Reserve officials regarding rate cuts in 2026, with some suggesting no changes throughout the year; unlike the strong consensus for three rate cuts in the second half of 2025, the market's expectations for rate cuts in 2026 have become increasingly unclear, and this ongoing uncertainty regarding the rate-cutting path could be a significant negative catalyst for the bond market In addition, some investors have indicated that the fiscal stimulus measures from U.S. President Donald Trump's tax and spending policies are expected to drive significant growth in the U.S. economy by 2026, but may prevent long-term U.S. Treasury yields from continuing the downward trajectory seen this year. "I think next year will be trickier," said Jimmy Chang, Chief Investment Officer of Rockefeller Global Family Office. "Short-term U.S. Treasury yields will continue to decline, as the Federal Reserve may lower interest rates one or two more times at least by 2026, but the investment returns on short-term U.S. Treasuries (2 years and below) are likely to be less robust than this year in 2026. Meanwhile, the acceleration of economic growth and the inflation effects brought by tariffs may continue to push up longer-term U.S. Treasury yields in 2026... Therefore, these factors may negatively impact the total returns of U.S. Treasuries in 2026," he stated in an interview. **Duration Concerns** As a key measure of borrowing costs between the government and the U.S. private sector, the benchmark 10-year U.S. Treasury yield has fallen more than 40 basis points this year, hovering around 4.1% as of Monday. The Federal Reserve's three consecutive rate cuts since October, the panic funds brought by "AI bubble rhetoric," and the rise in yields of European and Japanese bonds have driven global low-risk preference funds toward U.S. Treasuries, alongside growing market concerns about the U.S. labor market, fueling this strong rebound. ![1767151726(1).png](https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20251231/1767151732661536.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg) Few investors expect a repeat of this strong trend in 2026. Many market participants are betting that the 10-year yield will be at or slightly above current levels by the end of next year. J.P. Morgan's analyst team expects the 10-year U.S. Treasury yield to reach 4.35% by the end of 2026, while Bank of America’s interest rate analysts predict it will be around 4.25%. Anders Persson, Chief Investment Officer and Global Head of Fixed Income at Nuveen, stated that he expects the benchmark 10-year U.S. Treasury yield to decline to around 4%, but he is cautious about the performance of long-term bonds, as rising global government debt levels may push up yields on these maturities, meaning that the "term premium" will continue to rise and remain a core logic affecting U.S. Treasuries with maturities of 10 years and above. "We may see the long end of the U.S. Treasury yield curve largely anchored and potentially trending slowly upward," he said in an interview, adding that he still "underweights duration assets," meaning that the proportion of longer-term U.S. Treasury assets he holds is less compared to other U.S. Treasury assets—such long-duration bonds often suffer larger negative impacts when global government bond yields rise. **Widening Credit Spreads?** The credit spread of investment-grade corporate bonds—the premium paid by high-rated companies issuing bonds relative to U.S. Treasuries—was about 80 basis points as of Monday, roughly the same as at the beginning of the year and close to the lowest level since 1998 ![1767151746(1).png](https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20251231/1767151747169929.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg) The chart above shows the investment-grade credit spreads over the past year. The spread at the end of the year is roughly the same as at the beginning of the year and is close to the lowest level since 1998. The total return on investment-grade corporate bonds this year—measured by the widely used ICE BofA US Corporate Index (.MERC0A0)—is close to 8% as of Monday, far exceeding last year's 2.8%. The investment return on so-called junk bonds (measured by the ICE BofA US High Yield Index) is about 8.2%, even higher than the total return on investment-grade corporate bonds, nearly matching last year's strong performance. Analysts at JP Morgan predict that investment-grade credit spreads may significantly widen to 110 basis points next year, primarily due to JP Morgan's expectation of a substantial increase in corporate bond issuance by U.S. technology companies; they also forecast that the overall total return on high-rated bonds will drop to just 3%. However, some institutions are more bullish, with BNP Paribas predicting that by the end of next year, the spread will only be 80 basis points. Emily Roland, co-chief investment strategist at Manulife John Hancock Investments, expressed extreme optimism about the fundamentals and returns on bonds from companies leaning towards "high quality" by 2026, as she expects the U.S. economy to slow significantly next year, and the Federal Reserve's rate cuts to be more aggressive than the market currently prices in. "The bond market has not sensed what we believe will come in 2026: disinflation and a slower economic growth pace," she emphasized. "From a fundamental perspective, corporate bond prices should rise significantly." However, bond market traders generally hold a cautious stance on high-rated corporate bonds (i.e., investment-grade corporate bonds) for 2026. In the context of the AI lending frenzy, the recent turmoil in the private credit market, and the ongoing macro environment disturbed by "AI bubble rhetoric," those high-rated corporate bonds that are trading at historically low spreads and appear to be the safest have recently become the most likely assets for Wall Street institutions to reduce positions or even short-sell. Michael Hartnett, a strategist at Bank of America known as "Wall Street's most accurate strategist," made a bold prediction in his latest report: the "best trade" entering 2026 will be shorting the corporate bonds of "hyperscalers" that have invested heavily in the AI sector. He believes that the debt pressure caused by the accelerated construction of AI data centers will become the new "Achilles' heel" for these tech giants. "If the AI lending boom continues to heat up while a large number of new issuances flood the market, borrowers will have to pay a higher price. If the cost of borrowing for companies increases, their earnings will be significantly reduced, potentially bursting the false prosperity bubble in the market." John Stopford, head of multi-asset income at the Wall Street asset management firm Ninety One, stated in a report that he has nearly reduced the credit exposure of his funds to zero in recent weeks. As the most intuitive barometer of the "AI bubble theory," the credit default swap (CDS) market has already raised a red flag. Recently, the 5-year credit default swap (CDS) spread for Oracle has nearly doubled to 150 basis points over the past two months, reaching levels not seen since 2009. Even Microsoft's CDS spread has surged from around 20.5 basis points at the end of September to about 40 basis points. Bond yields also reflect a "distortion" in credit ratings: the yield on Oracle's corporate bonds maturing in 2035 has risen to 5.9%, surpassing that of some high-quality "junk bonds," indicating that the market's pricing of its credit risk is deviating from investment-grade status. In the context of an intensifying competition for AI computing infrastructure, even cash-rich high-rated tech companies have had to incur massive debt to support related investments. Morgan Stanley predicts that global investments in hyperscale AI data centers will reach approximately $2.9 trillion by 2028, with more than half (about $1.5 trillion) relying on external financing. It is understood that Amazon has recently launched its first investment-grade bond issuance in three years, aiming to raise $15 billion; Oracle plans to finance its collaboration with OpenAI for a hyperscale AI data center project through substantial debt financing—an approximately $38 billion debt financing deal is in progress, which is also the largest AI infrastructure debt financing to date. Additionally, the "Stargate" project, a collaboration between SoftBank and Oracle, is expected to exceed $400 billion in investment over the next three years. This almost reckless capital expenditure has put immense pressure on what was originally a robust balance sheet. Investors with a keen sense of the bond market are beginning to reassess the default risks of these tech giants, leading to significant turbulence in the credit pricing system ## Related News & Research - [Prices may rise more this year than the Fed predicts, global forecasting group says—what that means for your money](https://longbridge.com/en/news/281369686.md) - [Byggmax Calls 2026 AGM and Proposes Dividend, Governance Resolutions](https://longbridge.com/en/news/281216413.md) - [Clean Max Fully Prepays ₹499-Crore Listed Debentures Ahead of Schedule](https://longbridge.com/en/news/281580900.md) - [Buy the dip in treasuries, strategist says. Here’s why.](https://longbridge.com/en/news/281656332.md) - [Marico says Pawan Agrawal to lead overall international business of Marico effective April 1, 2026](https://longbridge.com/en/news/281332294.md)