My view on fixed income markets at the beginning of 2026 remains consistent with my
perspective from 2025: I continue to expect long-maturity, high-quality government bond
yields to rise substantially.
Global competition for capital will remain strong in 2026, as almost every government
will continue to issue debt to finance deficits, putting upward pressure on yields.
Furthermore, when factoring in the flood of artificial intelligence (AI)-related debt supply,
the volume of new bond issuance is even greater than I feared last year. As a result, I
expect yield curves to continue steepening in 2026, eventually reaching levels attractive
enough to prompt investors to move out of cash.
While the U.S. Treasury curve has already steepened, with long-maturity yields
directionally higher, I believe there is still a long way to go. Yields have moved higher,
with the Bloomberg Global Aggregate Index’s yield at the end of 2025 not far from its
highest level1 since the global financial crisis. Remember, this has happened when
central banks have been cutting rates.
But I believe investors in U.S. Treasuries will need much more additional yield to
abandon cash rates in favor of longer-maturity debt. The difference between cash rates
and the 10-year Treasury yield in the U.S. was a little more than 30 basis points (bps) as
of January 2, 2026.2 A magnitude of about 150 to 200 bps in the spread could make
bonds on the long end attractive, in my view.
That might seem like a lot, but other countries have already established that type of yield
curve. In New Zealand, the difference between cash and 10-year government note
yields was more than 200 bps. In Canada, the same yield spread recently reached 120
bps. In Japan, the difference between cash and 30-year government bond yields was
nearly 270 bps.3
1 Yield to worst was 3.51% as of December 31, 2025.
2 Secured overnight financing rate was 3.87% and 10-year U.S. Treasury yield was 4.19% as of January 2, 2026. Source for all cash and government bond yields: Bloomberg Finance L.P.
3 All data as of January 2, 2026. Cash represented by the Reserve Bank of New Zealand overnight rate for New Zealand; Canadian overnight repo rate average for Canada; and MUTAN rate for Japan.
