Yield is destiny: Welcome to Year 4 of the bond bull market

WITH 2026 under way, a few factors are readily apparent across global fixed-income markets.

The slow-going bull market remains in the sweet spot; attractive yield levels should continue to accrue into solid returns over the intermediate to longer term; and the unusual geopolitical backdrop and asynchronous central bank cycles should keep creating opportunities to add value through active management.

Bull market Year 3: smooth sailing

Thanks to the bear market of 2022 lifting long-term yields back to historically attractive levels, the “yield is destiny” bond bull market has rolled along with the broad market benchmarks wrapping up their third calendar year of solid returns.

Although events such as US President Donald Trump’s unveiling of tariffs in the first quarter of 2025 and the accompanying market swoon created bumps along the way, the ongoing economic expansion – with moderate growth and inflation – has kept yields generally high and range-bound.

This is an environment where the highest-yielding sectors continue to post the strongest returns.

Since late 2022, the incremental income from spread products along with capital appreciation from spread compression have been fuelling the bull market almost entirely.

Meanwhile, until 2025, Treasuries were a bit of a drag on returns, underperforming cash as a result of range-bound long rates and generally inverted yield curves.

However, the situation has changed. Thanks to central bank rate cuts in the US and around the world, yield curves have steepened and turned positive, improving the odds of bonds outperforming cash.

In fact, because of the positive yield curve and a slight drop in yields, Treasuries finally outperformed cash and joined the bull market last year.

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So, while we now expect a smaller return contribution from spread products, long-term fixed income should pick up a tailwind from the yield advantage and roll down benefits provided by the newly positive yield curves.

Sea of divergences

The veneer of steady, broad market returns in recent years hid a turgid sea of divergence across central bank cycles, long-term interest rates, currencies, and the inter-sector performance of spread products.

At the heart of the divergence in long-term rates was a shift in the central bank landscape. At the onset of 2025 and throughout the first half of that year, virtually all emerging market and developed market central banks were in sync and widely expected to continue cutting rates from their post-Covid peaks.

Yet, the expected rate paths shifted meaningfully in the second half, with much of the field moving away from rate cuts and towards raising rates.

The principal cause of these shifts from dovish to neutral (or hawkish) can be attributed to a combination of hitting neutral earlier than expected, while inflation remained above target.

US and UK outperform

Despite ongoing fiscal concerns in the US and UK, their long rates nonetheless remained contained. In doing so, they outperformed many developed and emerging markets.

While expectations for additional rate cuts anchored long UK and US rates to some extent, an additional downforce may have come from proactive debt management efforts.

In the case of the US, the Treasury has resisted calls to issue more long-term debt, instead opting to fund larger deficits through short-dated T-bills, while also carrying out limited Treasury buybacks along the yield curve.

Meanwhile, in the UK, the Exchequer has shortened the maturities of new issuance to tamp down long yields.

Spreads: the new “steady for now” rates?

Although excess returns from spread products were once again positive in 2025 – as they have been throughout the three years of the bull market – they were more muted last year.

Spreads are narrower, and the bulk of the capital gains potential from narrowing spreads is well behind us at this point of the cycle. We are in a carry environment.

With spreads in the vicinity of all-time tights, the market is scanning for potential cracks in the foundation of the heretofore fundamentally firm credit environment.

In addition to the usual free-floating, late-cycle recession anxiety, concerns continue to mount regarding growing mergers and acquisitions risks, as well as the massive artificial intelligence infrastructure build-out.

Despite these concerns, industrials and utilities have continued to deliver positive excess returns. But these concerns have weighed on a relative basis, allowing the seemingly safer, heavily regulated financial sector to outperform.

What are the risks?

While it remains tempting to fear a mushrooming of geopolitical risk or an unforeseen economic downturn, we continue to fear fire over ice.

That is, should economic cycles turn up – resulting in a combination of stronger growth and/or higher inflation forcing more central banks towards tighter policy – fixed income could encounter a temporary buyers’ strike that would likely push yields higher and spreads wider.

During the past three years of range-bound yields and relatively steady spread sector outperformance, there have been repeated swings from optimism to pessimism, and vice versa.

This calls for the need to remain vigilant. We continue to monitor and evaluate the investment backdrop, relying on our fundamental research to discern the signal from the noise in our efforts to find relative value opportunities, and to add value during periods of market dislocations.

Year 4 of bond bull market ahead?

While we can hardly be certain as to what this year will bring, our a priori is more of the same: High and range-bound yields look set to persist, allowing this slow-go bull market to continue – where returns accrue not by a quick drop in yields and rise in prices, but rather by ongoing earnings from yield itself.

Albeit by thinner margins and with more idiosyncratic risk, spread products look set to deliver positive, but perhaps narrower, excess returns.

Additionally, as mentioned earlier, newly positive yield curves should give long-term fixed income a performance advantage relative to cash in the quarters ahead.

Fixed-income valuations have moved to the “attractive” range relative to equities – a configuration that has historically signalled competitive risk-adjusted returns from bonds relative to stocks.

And in terms of the stock-bond correlation, the US Federal Reserve remains either on hold or, more likely, biased to ease.

Unlike 2022 – when bonds and stocks tumbled in unison – history suggests that under these conditions, if stocks suffer a severe correction, bonds should deliver strong returns, providing ballast to portfolios.

We remain guardedly optimistic on entry into what stands to be the fourth year of the “yield is destiny” bond bull market, where high and range-bound yields result in solid returns, and confusion creates ample opportunities for adding value through active management.

Given the wide spectrum of risks and outcomes, vigilance remains in order.

The writer is chief investment strategist, fixed income and head of global bonds, PGIM