Investors will continue to earn solid income from bonds in 2026, but should not take on too much risk, according to the Wells Fargo Investment Institute. The firm expects interest rates and credit spreads to remain range-bound next year, with the 10-year Treasury yield ending in 2026 between 4% and 4.5%. Also, after the Fed cut interest rates by a quarter of a percentage point this week, we believe it is likely that they will cut further toward a neutral policy rate. Therefore, Wells Fargo said in its 2026 outlook that the yield curve should steepen as short-term interest rates fall and yields on medium- and long-term assets rise. “Yields should remain a central focus for investors in 2026, and credit quality should be a key indicator to watch, as earnings sustainability and continued capital market access are likely to drive strong performance for investment-grade, high-yield corporate issuers,” Wells Fargo said in its 2026 outlook. Brian Lehring, head of global fixed income strategy, said investors should rethink their cash holdings as short-term interest rates have fallen. Yields on money market funds have already fallen from 5% to about 4%, but a record $7.66 trillion was sitting in products as of Wednesday, according to the Investment Company Institute. “We want to aim to get out of cash, but we don’t want it for too long,” he said in the company’s outlook presentation. That means taking on some credit risk but sticking to maturities between three and seven years, he noted. Mr Lehring said there would not be much upside in terms of price appreciation as credit spreads remain at very tight levels. “This bond market is a yield market,” he said. “So you want to go find a yield, and I think your yield is going to be pretty close to your return in most cases.” So Lehring focuses on areas where you can get attractive yields without taking too much risk. This means investment-grade corporate bonds and securitized assets such as mortgage-backed securities and asset-backed securities, he said. Among investment-grade bonds, there is relative value in sectors that are less affected by tariffs and rapid changes in technology, such as financials and telecommunications, the firm said in its outlook. Mr. Lehring doesn’t believe there’s a risk/return in lower-rated, riskier bonds. “If there are any unexpected problems in the economy, we will be hit hard,” he warned. Additionally, Wells Fargo favors municipal bonds for high-income taxpayers, particularly investment-grade municipal general obligation bonds and water/power revenue bonds.
