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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.
In 1/1 renewals, prices decreased, which could mean it’s more important for investment portfolios to deliver results to make up for tight margins in the underwriting section of the company.
Below, we look at four major factors that could affect fixed income returns in 2026.
Whilst often referred to in data as falling, the “cost of living crisis” still continues in many countries.
Data published yesterday showed core US inflation (excluding energy and food) came in at 2.6% for December, below the 2.7% market consensus.
"Leading into this latest US inflation print, markets have been eerily quiet, this is despite the brewing geopolitical risks and a fresh attack by the US president on the independence of the world’s largest central bank," Jonathan Moyes, Head of Investment Research, Wealth Club. Both equities and bond markets have rallied, with the dollar weakening a touch.
"The ball is now back in the Federal Reserve’s court," said Moyes. "The message throughout 2025 has been one of caution. Clearly, the Federal Reserve has been reticent about cutting too far too soon. There are several crosscurrents in play; there are question marks over the extent to which trade tariffs, tax cuts and geopolitics will feed through into future inflation numbers."
Inflation rate data had been disrupted in the US due to the government shutdown; however, the most recent data said that the annual inflation rate eased to 2.7% for the 12 months ending November, down from 3.0% previously reported for September, according to US Labor Department data released on December 18, 2025. The next set of data will be out on Monday.
“The US is adopting a more inward-looking stance, which is weakening the structural demand for dollar-denominated assets among emerging economies."
In the UK, the Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.5% in the 12 months to November 2025, down from 3.8% in the 12 months to October, according to the Office of National Statistics data.
“Despite opportunities, the macro backdrop of policy-induced volatility, historically low spreads, and inflation concerns calls for prudence,” said Joe Steidl, Head of UK Insurance Distribution at Invesco. “Valuations across public markets remain elevated, while credit spreads are compressed to near-historic lows – limiting the margin for error and amplifying reinvestment risk. In this environment, insurers cannot rely solely on traditional fixed income to deliver sustainable returns.”
Eurostat said that Euro area annual inflation was 2.1% in November 2025, which was “stable compared to October 2025”.
“The US is adopting a more inward-looking stance geopolitically and economically, which is weakening the structural demand for dollar-denominated assets among many emerging economies,” said Giordano Lombardo, CEO and Co-Chief Investment Officer, Plenisfer Investments. “This challenges the assumptions behind both equity and fixed income benchmarks.”
Many expect interest rates around the world to continue to fall as central banks slash rates to encourage economic action.
In December, the US Federal Reserve cut rates, which meant the benchmark is down 200 basis points from its peak in 2023.
“Lower rates drive favourable financing conditions,” said Randy Schwimmer, Chief Investment Strategist at Churchill Asset Management, in a recent edition of his Lean Left newsletter.
US inflation expectations for the coming two years, said CCLA Investment Management, in its latest update, rose above 2.7% for the first time since mid-2024. “This rise may result from President Trump’s pressure on the Fed to cut interest rates, despite above-target inflation,” it said. “Trump has installed the chair of his Council of Economic Advisors, Stephen Miran, to the nominally independent Fed,” it added.
“All eyes on US core inflation amid concerns the US could turn into a banana republic amid central bank interference."
“2026 is no doomsday scenario,” said Charlie French, Chief Investment Officer at Impax Asset Management. “Several factors look supportive of risk assets, including global equities: expansionary fiscal policy and falling interest rates – not least in the US – should provide a constructive environment for both equities and credit. Even so, we do not expect 2026 to be a year in which all risk assets rise indiscriminately, reinforcing the importance of selectivity and fundamental analysis.”
Elsewhere, others in the market were less circumspect, especially amid the backdrop of Trump’s comments on action against Iran.
However, there are further complications with an investigation launched against Federal Reserve Chair Jerome Powell, which has built on the Trump administration's moves against central bank independence over the past year.
“All eyes on US core inflation amid concerns the US could turn into a banana republic amid central bank interference,” said Susannah Streeter, Chief Investment Strategist, Wealth Club.
“Former Treasury Secretary Janet Yellen has described the opening of a criminal investigation into the testimony of Jerome Powell as chilling and [a sign that] the US was on the road to being a banana republic,” she said.
The current UK interest bank rate was set at 3.75% on 18 December, with the next decision due on 5 February 2026.
“We still think that interest rates are on a gradual downward path,” said the statement from the Monetary Policy Committee (MPC) in December.
Since August 2024, the interest rate has been cut six times. “We think that Bank Rate is likely to fall gradually further in future, but that will depend on whether variables like pay growth and services inflation continue to ease.”
“Inflation has drifted lower, notably more so in Europe, but remains structurally higher than 2010–2020 due to deglobalisation and supply side rigidities."
The decision was on 5-4 of committee members, showing that future decisions were less concrete than thought.
In the EU, the European Central Bank (ECB) left borrowing costs unchanged for a fourth consecutive meeting in December 2025, with the main refinancing rate remaining at 2.15% and the deposit facility rate holding at 2%. The decision had been expected, and policymakers reiterated that they would continue to follow a “data-dependent and meeting-by-meeting approach”.
“Inflation has drifted lower, notably more so in Europe, but remains structurally higher than 2010–2020 due to deglobalisation and supply side rigidities,” said Stanislas De Bailiencourt, Deputy Chief Investment Officer, Head of Fixed Income and Asset Allocation, at French company Sycomore Asset Management. “The ECB has already executed a significant easing cycle during the last 18 months, but we believe one additional cut remains possible.”
Despite downward pressure, it appears that inflation and interest rates will still be a large part of the conversation in 2026. Interest rates, especially, will lower more slowly than many hope.
