John Hancock: 2026 Fixed-Income Outlook

2026 Fixed-Income Outlook: Opportunities Amid an Uncertain Landscape

The past year reminded bond investors just how quickly conditions can change. As we move into 2026, uncertainty remains part of the picture — but so does opportunity. We continue to see strong reasons for optimism around the role that core and core-plus fixed income can play within a diversified investment strategy.

Economic resilience with shifting dynamics

Despite volatile markets and ongoing interest rate uncertainty throughout 2025, the U.S. economy has held up better than many expected. Growth has remained steady, and corporate fundamentals continue to look healthy. Entering 2026, many companies are reporting solid earnings and maintaining strong balance sheets — a supportive backdrop for credit markets.

At the same time, the labor market is beginning to cool. Hiring activity has slowed, and demand for workers has eased compared to last year. This trend is important because employment is a key factor in Federal Reserve policy decisions. If labor conditions continue to soften, the Fed may have greater room to reduce interest rates over the coming year.

Markets are currently pricing in multiple rate cuts by the end of 2026, though the pace and magnitude will depend on how inflation and employment data evolve. With monetary policy decisions notoriously difficult to forecast, we believe investors may benefit from strategies that can adapt to changes in the yield curve rather than relying on precise rate predictions.

A shifting yield curve creates new possibilities

One of the most notable developments in 2025 has been the continued steepening of the yield curve, driven by a widening gap between short-term and long-term interest rates. For fixed-income investors, this environment can be especially favorable.

Historically, intermediate-term bonds — particularly those in the 5- to 7-year range — have performed well during periods of yield curve steepening. This segment often offers a compelling balance between income potential and interest rate sensitivity. While future Fed actions remain uncertain, our base case assumes the yield curve continues to normalize, creating opportunities in this “middle” portion of the curve.

Corporate bonds: fundamentals remain strong, but selectivity matters

Corporate issuers enter 2026 in solid financial shape, supported by stable earnings and manageable debt levels. However, if economic growth slows and interest rates decline, credit spreads may widen as investors demand additional compensation for risk — even when corporate balance sheets remain sound.

In this environment, headline yields only tell part of the story. Performance can vary widely by sector and issuer, making careful credit analysis essential. Active management and thoughtful security selection can help identify companies with durable fundamentals that may be temporarily mispriced by the market.

The role of mortgage-backed securities

Agency mortgage-backed securities (MBS) continue to stand out within fixed income. Backed by government-sponsored entities such as Fannie Mae and Freddie Mac, these securities offer high liquidity and minimal credit risk. Over the past year, agency MBS have benefited from reduced rate volatility and yields that remain competitive with corporate bonds.

With many fixed-income sectors trading at historically tight spreads, single-family agency MBS remain attractive due to their combination of liquidity, yield, and structural support. That said, security selection is critical. As interest rates decline, refinancing activity may increase, raising prepayment risk and altering expected cash flows. Managing this risk effectively is key to unlocking value in the sector.

While discussions around GSE reform and potential privatization continue, the market generally expects some form of government support to remain in place. Additionally, recent policy conversations have raised the possibility of targeted GSE purchases of agency MBS during periods of market stress — a factor that could help stabilize spreads, though it is not currently priced into the market.

Looking ahead

As we head into 2026, the outlook for high-quality fixed income remains constructive. Yields are still elevated relative to long-term averages, offering the potential for attractive risk-adjusted returns and mid-single-digit gains over time.

By emphasizing quality, maintaining flexibility, and responding thoughtfully to evolving market conditions, bonds can continue to serve as a stabilizing and income-generating component of diversified portfolios. While uncertainty may persist, the fixed-income market offers plenty of reasons for cautious optimism in the year ahead.

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