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What will fixed income do in 2026, and what yields will it deliver are of key concern to insurance investment teams.
After exploring what could happen in inflation and interest rates, we look at real estate and unemployment data to see what the larger economic effect could be and what this could mean for fixed income portfolios.
High unemployment signals economic weakness, prompting central banks to lower interest rates, which makes existing fixed-income bonds more valuable as prices rise, and yields fall.
With this in mind, unemployment is rising in the US, the UK, and the EU.
The most recent US unemployment data was released on December 16, which showed total nonfarm payroll employment changed little in November – a 64,000 increase – and has shown little net change since April, said the US Bureau of Labor Statistics. In November, the unemployment rate, at 4.6%, was little changed from September, when it stood at 4.4%.
“While some modest deterioration in the labour markets is likely, we see the dynamics of supply and demand moving into balance."
The rate, however, is the highest since October 2021.
Employment rose in healthcare and construction in November, while the federal government continued to lose jobs.
“While some modest deterioration in the labour markets is likely, we see the dynamics of supply and demand moving into balance,” said Cindy Beaulieu, Chief Investment Officer, Conning North America. “We do not see slowing job growth as significant enough to cause the consumer to pull back, nor provide reason for the Fed to aggressively lower rates.”
In the UK, between August and October 2025, the period comparable with the Office of National Statistics Labour Force Survey (LFS) estimates, the number of payrolled employees fell by 113,000 (0.4%) over the year (from August to October 2024), and by 24,000 (0.1%) over the quarter.
The UK unemployment rate for people aged 16 years and over was estimated at 5.1% in August to October 2025. This is up in the latest quarter and above the estimates of a year ago.
The Euro area unemployment was at 6.4% in October 2025, according to Eurostat. The EU unemployment rate stood at 6.0% in October 2025. Compared with September 2025, unemployment increased by 32,000 in the EU and decreased by 13,000 in the Euro area. Compared with October 2024, unemployment increased by 517,000 in the EU and by 308,000 in the Euro area.
"We expect the Fed to deliver most of these, but perhaps not all, in order to find the right balance between growth, unemployment and remaining inflation."
Business leaders' views in G20 countries as to the risks most likely to pose the greatest threat to their country in the next two years, according to the World Economic Forum’s Executive Opinion Survey, unemployment was listed in several countries in the top five issues.
Italy and France listed unemployment as an issue. While those countries, as well as the UK, US, Germany, Australia, and Canada, listed economic downturn (e.g., recession or stagnation) as one of their top five concerns.
“The market is pricing substantial Fed cuts; we expect the Fed to deliver most of these, but perhaps not all, in order to find the right balance between growth, unemployment and remaining inflation,” said Stanislas De Bailiencourt, Deputy Chief Investment Officer, Head of Fixed Income and Asset Allocation, at French company Sycomore Asset Management.
House price changes could affect insurance investment fixed income portfolios through interest rate dynamics, wealth effects on consumer behaviour, and credit risk exposure in mortgage-related securities.
In September 2025, Insurance Investor looked in-depth at US house prices, which were seeing a dip, with some calling it a “correction” and others saying a modest fall could continue due to outward macroeconomic pressures.
There was a vast regional difference; they were up in the Northeast, and down in the West and South.
Last week, Trump proposed, on social media, a crack down on Wall Street in an effort to lower home prices and ease affordability woes.
Trump said he would move to ban large institutional investors from "buying more single-family homes", and he urged Congress to codify the policy into law. He accused industry behemoths of buying up properties and shutting average Americans out of the housing market.
“We're seeing a dynamic market in our core space, which is mid-market commercial construction in the US."
This could lead to some divestment from the allocators, and also could change some trends in house prices.
According to the US Census Bureau and the US Department of Housing and Urban Development’s most recent data (Q2 2025), the median sales prices for houses sold in the US had decreased (from Q1) to $410,800 from $423,100.
Todd Campbell, CEO of Builders Insurance, said in December 2025 that there was a slowdown in the US house construction market. This, therefore, meant house prices were decreasing for reasons likely independent from increased supply.
“We're seeing a dynamic market in our core space, which is mid-market commercial construction in the US,” he said. “The macro trends we're seeing are a slowdown in the home building space. We're not seeing nearly the level of slowdown that we are in the standard home building market. There is caution, but we're not as impacted by tariffs per se as some of our larger brethren, but we are impacted by folks becoming cautious.”
However, the real estate listing giant Zillow put the typical home values at $359,241, with a one-year value change of +0.1%, according to data through November 30, 2025.
This could be a sign of an overall worsening economic picture in the US. House prices affect fixed income investments primarily through their impact on the overall economy, central bank monetary policy, and investor behaviour.
The relationship is indirect, with shared underlying drivers such as interest rates and inflation, rather than a direct causal link from house prices to fixed income performance. Though many insurers have large investments in mortgages and real estate holdings, which could see pricing pressures.
“We expect housing market activity to strengthen further as affordability improves gradually via income growth outpacing house price growth."
The year could see more sale volumes due to interest rate changes, though.
In the UK, the average property price fell by 0.4% in December to £271,068 after forecasts of a 0.1% month-on-month rise.
Nationwide, the UK’s second-largest overall mortgage provider, said it was still positive for 2026 in terms of volume of sales and house price growth. “We expect housing market activity to strengthen a little further as affordability improves gradually via income growth outpacing house price growth and a further modest decline in interest rates,” it said in its 2026 outlook. “We expect annual house price growth to remain broadly in the 2 to 4% range next year.”
Last week, HSBC became the first big UK lender to cut its mortgage rates in 2026. The reduction follows the Bank of England’s base cut in December, with further cuts expected this year.
