2025 has been a year marked by uncertainty and 2026 could feature more of the same. Nonetheless, it’s never too early for fixed income investors to position their portfolios to capture opportunities in the new year. Vanguard offered a window into what 2026 may look like and where the opportunities may arise in a recent market perspectives report.
The capital markets were undoubtedly fixated on artificial intelligence (AI) in 2025 while factors like tariffs, geopolitical tensions, and interest rates continued to percolate in the background. Monetary policy, in particular, was on the radar for fixed income investors and will continue to be in 2026. Given the persistent uncertainty, Vanguard is insistent that bonds are the place to be when 2025 turns into 2026.
“We maintain our secular view that high-quality bonds (both taxable and municipal) offer compelling real returns given higher neutral rates,” Vanguard said. “Returns should average near current portfolio income levels, representing a comfortable margin over the rate of expected future inflation.”
The Federal Reserve has said that it will institute only one cut in 2026, though it’s been met with skepticism. Of course, incoming economic data will ultimately dictate their actions, but irrespective of what the central bank ultimately decides, Vanguard maintains their conviction on the strength of bonds in the new year. With AI-related valuations starting to look frothy, it makes the case for bonds even more compelling.
“That’s the primary reason why bonds are back, regardless of what central banks do in 2026,” Vanguard added. “Importantly, U.S. fixed income should also provide diversification in a world where AI disappoints, leading to lower growth—a scenario with odds that we calculate to be 25%–30%.”
ETFs to Consider
ETFs offer the easiest pathway for bond exposure compared to single debt issues. With that said, the ideal fund to consider for those that simply want it all, the Vanguard Total Bond Market ETF (BND) offers the ideal ingress to the entire U.S. bond market. In a 60-40 portfolio, BND could essentially be the entire 40% if investors choose to do so.
Tighter credit spreads and improving quality are bringing corporate bonds within the purview of fixed income investors again. Higher yields are also a benefit in this rate-cutting cycle. This is where the Vanguard Total Corporate Bond ETF Shares (VTC) becomes the go-to choice for corporate bond exposure.
A shaky start thanks to heavy issuance translated into a strong end in 2025 for munis. With a combination of yield, credit quality, and tax-free income, they’re hard to beat. With that, consider using the Vanguard Tax-Exempt Bond ETF (VTEB) for broad muni exposure.
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