It’s been a bumpy ride so far this year for bond investors.
After posting strong returns in 2025, bond markets hit turbulence in the first months of 2026. Economic crosswinds related to Iran, inflation, and growth have buffeted interest rates—ultimately pushing bond prices down and yields up as Treasury rates broke out of their established trading range.
While it’s surely been frustrating for investors to see their bond holdings tread water, the good news is that yields are now at a higher starting point, which boosts the outlook for returns potential. And contrary to some news headlines, the reasons behind the recent volatility haven’t been all bad.
The 2026 bond market reset
Several major economic crosscurrents converged on the bond market in the first half of the year.
Energy-market disruptions in the Middle East ignited an inflationary impulse. An exceptionally strong corporate earnings backdrop, along with a stabilizing job market, helped ease worries of an economic slowdown, and even stoked talk of a potential reacceleration. And the sum of those forces—adding up to a stronger, more inflationary environment—led investors to reassess whether the Fed would have any leeway to lower interest rates further this year, or might even have to raise interest rates instead.
Individually, each of those forces has generally put upward pressure on interest rates. Taken together, they’ve driven “a resetting of expectations of where interest rates might land,” says Christine Thorpe, institutional portfolio manager on Fidelity’s fixed income team.
After seeing significant volatility in much of the first half of the year, interest rates at almost all maturities have been settling into higher trading ranges. In mid-May, the rate on 10-year Treasurys broke out above 4.5%, while the rate on 30-year Treasurys crossed above 5%. And investors now see the odds tilting toward a Fed rate hike before the end of 2026—a stark change from the start of the year, when investors expected 2 rate cuts.
Rates today: An attractive potential entry point
For bond investors, this year has brought a rockier ride than many expected. Because bond prices and yields move in opposite directions, the rise in yields this year has pushed bond prices lower, muting total returns. As of May 31, the bellwether Bloomberg US Aggregate Bond Index had returned 0.38% for the year so far, with coupon income helping to overcome price declines.
But that bumpy road has brought investors to firmer footing. “Yields appear very elevated and very attractive relative to where they have been for much of the past 2 decades,” says Thorpe. “And starting yields, while not a guarantee of future results, can be a good indication of where total returns could go.”
Higher starting yields can also help provide a buffer against future volatility. For example, a bond’s higher coupon income can offset modest price declines, allowing it to potentially still deliver a positive total return even amid volatility. Moreover, it's not a given that interest rates will keep rising from here. Although inflation concerns, higher oil prices, and solid earnings may help keep rates elevated in the near term, the longer-term picture could look different if energy market disruptions persist. If rising energy costs start to weigh on growth, investors could shift from inflation worries to economic slowdown concerns—a backdrop that has often put downward pressure on interest rates and helped to support Treasurys.
Positioning for the second half: 4 themes from Fidelity pros
The more favorable yield backdrop doesn’t mean all parts of the fixed income market offer equal opportunity, says Stacie Ware, comanager of Fidelity® Total Bond Fund (
Ware and her team follow a structured 5-step process in managing portfolios. They evaluate the broader economic environment, look for value across different segments of the bond market, and decide how to spread investments out across those segments, using Fidelity's proprietary risk tools. They also select individual securities through deep research and then build portfolios designed to balance opportunity with risk. In the current environment, this process has led to a few key themes in how they have positioned core bond portfolios:
1. Holding plenty of Treasurys
“Treasurys are very attractive,” says Ware, particularly after the recent rise in yields. Backed by the full faith and credit of the US government, they offer low risk of default, relatively attractive yields, and excellent liquidity. For those reasons, Ware and team have been favoring Treasurys as a place to store “dry powder”—meaning money they want to keep invested but still easily accessible, should market movements create fresh opportunities down the road.
2. Reducing exposure to certain corporate bonds
Corporate bonds look generally less attractive, Ware says. Currently, the extra yield, or “spread,” investors earn on average by buying a corporate bond—instead of a Treasury of the same maturity—is quite modest. That means investors receive relatively little compensation in exchange for taking on credit and default risk. Ware and team aren’t overly worried about these risks in the current economic environment—they feel that the corporate backdrop appears strong and aren’t forecasting an uptick in defaults. But still, “investors aren’t well compensated to own corporate securities right now,” she says. Ware is particularly cautious about long-term corporate bonds, where she says the risk-reward tradeoff is least favorable.
3. Not chasing new AI-related bond issuance
The AI trade has arrived in the bond market. Several hundred billion dollars of new debt is expected to be issued in 2026 by hyperscalers and other large tech-sector borrowers, to help fund the build-out of data centers and related infrastructure. Because these companies have high credit ratings, their bonds have generally offered only small yield premiums over Treasurys. For that reason, Ware and team have approached such deals with caution—especially as the heavy spending required for the AI buildout could increase these companies' borrowing needs and eventually raise questions about those high credit ratings. After all, a bond can’t rise in price indefinitely the way a stock can if an AI issuer is successful. But it could still lose value if the issuer is downgraded.
4. Hunting for unique yield opportunities
Fidelity’s core bond team has been finding some of the most attractive risk-reward profiles in less glamorous, and less easily understood, corners of the fixed income market. Ware highlights unique opportunities like commercial mortgage-backed securities backed by a single property type, “where the analyst can do due diligence at the property level.” Other areas of value have been the AAA-rated portion of certain collateralized loan obligations, and asset-backed securities backed by certain business franchise fees. In these niche areas, says Ware, “our team can really rely on the strength of our research analysts, and focus on what we’re good at.”
What it could mean for bond investors
The second half of the year may continue to present a complicated picture for bond investors.
The same forces that have driven yields higher—persistent inflation concerns and a surprisingly resilient economy—also point to a 2-sided outlook for interest rates. If inflationary pressures remain elevated or growth surprises further to the upside, rates could move higher still, creating additional short-term volatility for bond prices. At the same time, if energy prices move high enough and stay high, they could eventually trigger a meaningful slowdown in economic activity and pull yields lower.
Against that backdrop, today’s higher yields offer a helpful offset. With more attractive starting yields, bonds may be better positioned to generate returns over time, even if the path is uneven. And they can continue to play an important role in investor portfolios, providing income, potential diversification benefits, and potential ballast should a downturn occur.
With modest spreads offering little reward to investors hoping to stretch for yield, “it’s a more limited opportunity set right now,” says Thorpe. “Given that, investors should stay focused on patience and diversification.”